Guangdong Liantai Environmental ProtectionLtd's (SHSE:603797) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Guangdong Liantai Environmental ProtectionLtd (SHSE:603797) so let's look a bit deeper.

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 Liantai Environmental ProtectionLtd is:

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

0.072 = CN¥608m ÷ (CN¥10b - CN¥1.8b) (Based on the trailing twelve months to June 2024).

Therefore, Guangdong Liantai Environmental ProtectionLtd has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 5.6% generated by the Commercial Services industry, it's much better.

Check out our latest analysis for Guangdong Liantai Environmental ProtectionLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Guangdong Liantai Environmental ProtectionLtd's past further, check out this free graph covering Guangdong Liantai Environmental ProtectionLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.2%. The amount of capital employed has increased too, by 113%. So we're very much inspired by what we're seeing at Guangdong Liantai Environmental ProtectionLtd thanks to its ability to profitably reinvest capital.

The Bottom Line On Guangdong Liantai Environmental ProtectionLtd's ROCE

All in all, it's terrific to see that Guangdong Liantai Environmental ProtectionLtd is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 58% 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.

Guangdong Liantai Environmental ProtectionLtd does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Guangdong Liantai Environmental ProtectionLtd 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.