Here's What's Concerning About Guangzhou Ruoyuchen TechnologyLtd's (SZSE:003010) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Guangzhou Ruoyuchen TechnologyLtd (SZSE:003010), 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. To calculate this metric for Guangzhou Ruoyuchen TechnologyLtd, this is the formula:

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

0.027 = CN¥29m ÷ (CN¥1.3b - CN¥205m) (Based on the trailing twelve months to September 2023).

Therefore, Guangzhou Ruoyuchen TechnologyLtd has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 6.9%.

See our latest analysis for Guangzhou Ruoyuchen TechnologyLtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangzhou Ruoyuchen TechnologyLtd.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 21% five years ago, while capital employed has grown 157%. That being said, Guangzhou Ruoyuchen TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Guangzhou Ruoyuchen TechnologyLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Guangzhou Ruoyuchen TechnologyLtd has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Guangzhou Ruoyuchen TechnologyLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 54% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Guangzhou Ruoyuchen TechnologyLtd we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Guangzhou Ruoyuchen TechnologyLtd 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.