Guangdong Shenling Environmental Systems (SZSE:301018) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Guangdong Shenling Environmental Systems (SZSE:301018), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Guangdong Shenling Environmental Systems:

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

0.061 = CN¥203m ÷ (CN¥4.8b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

So, Guangdong Shenling Environmental Systems has an ROCE of 6.1%. On its own, that's a low figure but it's around the 6.7% average generated by the Building industry.

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'd like, you can check out the forecasts from the analysts covering Guangdong Shenling Environmental Systems for free.

What Can We Tell From Guangdong Shenling Environmental Systems' ROCE Trend?

When we looked at the ROCE trend at Guangdong Shenling Environmental Systems, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Guangdong Shenling Environmental Systems is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 37% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Guangdong Shenling Environmental Systems and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.