Returns On Capital Are Showing Encouraging Signs At Guangdong PAK Corporation (SZSE:300625)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Guangdong PAK Corporation (SZSE:300625) 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. To calculate this metric for Guangdong PAK Corporation, this is the formula:

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

0.078 = CN¥169m ÷ (CN¥3.2b - CN¥1.0b) (Based on the trailing twelve months to June 2024).

So, Guangdong PAK Corporation has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 6.0% generated by the Electrical industry, it's much better.

View our latest analysis for Guangdong PAK Corporation

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong PAK Corporation's ROCE against it's prior returns. If you're interested in investigating Guangdong PAK Corporation's past further, check out this free graph covering Guangdong PAK Corporation's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangdong PAK Corporation Tell Us?

Guangdong PAK Corporation is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 56% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Guangdong PAK Corporation's ROCE

In summary, we're delighted to see that Guangdong PAK Corporation has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 10% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 2 warning signs we've spotted with Guangdong PAK Corporation (including 1 which is significant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.