ShenZhen GAD Environmental Technology (SZSE:300854) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at ShenZhen GAD Environmental Technology (SZSE:300854), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 ShenZhen GAD Environmental Technology, this is the formula:

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

0.003 = CN¥3.0m ÷ (CN¥1.6b - CN¥616m) (Based on the trailing twelve months to March 2024).

Thus, ShenZhen GAD Environmental Technology has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 4.6%.

See our latest analysis for ShenZhen GAD Environmental Technology

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'd like to look at how ShenZhen GAD Environmental Technology has performed in the past in other metrics, you can view this free graph of ShenZhen GAD Environmental Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of ShenZhen GAD Environmental Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On ShenZhen GAD Environmental Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ShenZhen GAD Environmental Technology. These growth trends haven't led to growth returns though, since the stock has fallen 31% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for ShenZhen GAD Environmental Technology (of which 1 makes us a bit uncomfortable!) that you should know about.

While ShenZhen GAD Environmental Technology 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.