Guangdong Feinan Resources Recycling (SZSE:301500) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Guangdong Feinan Resources Recycling (SZSE:301500) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Guangdong Feinan Resources Recycling, this is the formula:

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

0.072 = CN¥493m ÷ (CN¥12b - CN¥5.4b) (Based on the trailing twelve months to September 2024).

Thus, Guangdong Feinan Resources Recycling has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 5.3% generated by the Commercial Services industry, it's much better.

Check out our latest analysis for Guangdong Feinan Resources Recycling

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 Feinan Resources Recycling's past further, check out this free graph covering Guangdong Feinan Resources Recycling's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Guangdong Feinan Resources Recycling's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 30% 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.

On a side note, Guangdong Feinan Resources Recycling's current liabilities have increased over the last five years to 44% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Guangdong Feinan Resources Recycling's ROCE

While returns have fallen for Guangdong Feinan Resources Recycling in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat 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.

One final note, you should learn about the 3 warning signs we've spotted with Guangdong Feinan Resources Recycling (including 2 which shouldn't be ignored) .

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.

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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.