Guangdong Shenling Environmental Systems (SZSE:301018) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Guangdong Shenling Environmental Systems (SZSE:301018) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guangdong Shenling Environmental Systems is:

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

0.027 = CN¥86m ÷ (CN¥5.2b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Guangdong Shenling Environmental Systems has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Building industry average of 7.8%.

Check out our latest analysis for Guangdong Shenling Environmental Systems

In the above chart we have measured Guangdong Shenling Environmental Systems' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guangdong Shenling Environmental Systems .

So How Is Guangdong Shenling Environmental Systems' ROCE Trending?

On the surface, the trend of ROCE at Guangdong Shenling Environmental Systems doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 2.7%. However it looks like Guangdong Shenling Environmental Systems 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Guangdong Shenling Environmental Systems is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 68% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 2 warning signs for Guangdong Shenling Environmental Systems (1 is significant) you should be aware of.

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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.