Guangdong Piano Customized Furniture (SZSE:002853) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. However, after investigating Guangdong Piano Customized Furniture (SZSE:002853), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Guangdong Piano Customized Furniture:

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

0.087 = CN¥121m ÷ (CN¥2.3b - CN¥903m) (Based on the trailing twelve months to September 2023).

Therefore, Guangdong Piano Customized Furniture has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 8.1%.

See our latest analysis for Guangdong Piano Customized Furniture

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 Guangdong Piano Customized Furniture has performed in the past in other metrics, you can view this free graph of Guangdong Piano Customized Furniture's past earnings, revenue and cash flow.

What Can We Tell From Guangdong Piano Customized Furniture's ROCE Trend?

On the surface, the trend of ROCE at Guangdong Piano Customized Furniture doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Guangdong Piano Customized Furniture's current liabilities have increased over the last five years to 40% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 8.7%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

To conclude, we've found that Guangdong Piano Customized Furniture is reinvesting in the business, but returns have been falling. Since the stock has declined 62% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Guangdong Piano Customized Furniture does have some risks though, and we've spotted 1 warning sign for Guangdong Piano Customized Furniture that you might be interested in.

While Guangdong Piano Customized Furniture 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.