Gansu Engineering Consulting Group (SZSE:000779) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 investigating Gansu Engineering Consulting Group (SZSE:000779), 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. To calculate this metric for Gansu Engineering Consulting Group, this is the formula:

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

0.061 = CN¥242m ÷ (CN¥5.4b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

So, Gansu Engineering Consulting Group has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

View our latest analysis for Gansu Engineering Consulting Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gansu Engineering Consulting Group'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 Gansu Engineering Consulting Group.

The Trend Of ROCE

We weren't thrilled with the trend because Gansu Engineering Consulting Group's ROCE has reduced by 58% over the last five years, while the business employed 105% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Gansu Engineering Consulting Group might not have received a full period of earnings contribution from it.

The Bottom Line

In summary, we're somewhat concerned by Gansu Engineering Consulting Group's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 4.7% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Gansu Engineering Consulting Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Gansu Engineering Consulting Group 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.