Guangdong Real-Design Intelligent Technology (SZSE:301135) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Guangdong Real-Design Intelligent Technology (SZSE:301135), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Guangdong Real-Design Intelligent Technology is:

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

0.0019 = CN¥2.5m ÷ (CN¥1.8b - CN¥469m) (Based on the trailing twelve months to September 2023).

Thus, Guangdong Real-Design Intelligent Technology has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.5%.

Check out our latest analysis for Guangdong Real-Design Intelligent Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Real-Design Intelligent Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangdong Real-Design Intelligent Technology.

What Can We Tell From Guangdong Real-Design Intelligent Technology's ROCE Trend?

On the surface, the trend of ROCE at Guangdong Real-Design Intelligent Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.2% from 9.8% five years ago. 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'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.

On a side note, Guangdong Real-Design Intelligent Technology has done well to pay down its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Guangdong Real-Design Intelligent Technology's ROCE

In summary, Guangdong Real-Design Intelligent Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Guangdong Real-Design Intelligent Technology has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Guangdong Real-Design Intelligent Technology (2 are a bit unpleasant) you should be aware of.

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.

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

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.