Ginlong Technologies (SZSE:300763) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Ginlong Technologies (SZSE:300763) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Ginlong Technologies, this is the formula:

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

0.043 = CN¥699m ÷ (CN¥22b - CN¥5.6b) (Based on the trailing twelve months to March 2024).

So, Ginlong Technologies has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

Check out our latest analysis for Ginlong Technologies

Above you can see how the current ROCE for Ginlong Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ginlong Technologies .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ginlong Technologies doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 4.3%. However it looks like Ginlong Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Ginlong Technologies is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 404% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 4 warning signs we've spotted with Ginlong Technologies (including 2 which are a bit unpleasant) .

While Ginlong Technologies 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com