Returns Are Gaining Momentum At Guangzhou Haozhi IndustrialLtd (SZSE:300503)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Guangzhou Haozhi IndustrialLtd (SZSE:300503) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Guangzhou Haozhi IndustrialLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.043 = CN¥74m ÷ (CN¥2.7b - CN¥910m) (Based on the trailing twelve months to September 2024).

Therefore, Guangzhou Haozhi IndustrialLtd has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.2%.

See our latest analysis for Guangzhou Haozhi IndustrialLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Guangzhou Haozhi IndustrialLtd has performed in the past in other metrics, you can view this free graph of Guangzhou Haozhi IndustrialLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.3%. The amount of capital employed has increased too, by 33%. So we're very much inspired by what we're seeing at Guangzhou Haozhi IndustrialLtd thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 34% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

All in all, it's terrific to see that Guangzhou Haozhi IndustrialLtd is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 81% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about Guangzhou Haozhi IndustrialLtd, we've spotted 3 warning signs, and 2 of them are potentially serious.

While Guangzhou Haozhi IndustrialLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.