Guang Dong Qun Xing Toys co.Ltd (SZSE:002575) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Guang Dong Qun Xing Toys co.Ltd's (SZSE:002575) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guang Dong Qun Xing Toys co.Ltd, this is the formula:

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

0.0071 = CN¥5.8m ÷ (CN¥841m - CN¥29m) (Based on the trailing twelve months to September 2023).

Thus, Guang Dong Qun Xing Toys co.Ltd has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Leisure industry average of 6.4%.

Check out our latest analysis for Guang Dong Qun Xing Toys co.Ltd

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 Guang Dong Qun Xing Toys co.Ltd has performed in the past in other metrics, you can view this free graph of Guang Dong Qun Xing Toys co.Ltd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Guang Dong Qun Xing Toys co.Ltd is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.7%, which is always encouraging. While returns have increased, the amount of capital employed by Guang Dong Qun Xing Toys co.Ltd has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

In Conclusion...

To bring it all together, Guang Dong Qun Xing Toys co.Ltd has done well to increase the returns it's generating from its capital employed. Given the stock has declined 29% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Guang Dong Qun Xing Toys co.Ltd does have some risks though, and we've spotted 2 warning signs for Guang Dong Qun Xing Toys co.Ltd that you might be interested in.

While Guang Dong Qun Xing Toys co.Ltd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.