Guangdong Guanghong HoldingsLtd (SZSE:000529) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Guangdong Guanghong HoldingsLtd (SZSE:000529), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Guangdong Guanghong HoldingsLtd:

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

0.005 = CN¥23m ÷ (CN¥7.1b - CN¥2.5b) (Based on the trailing twelve months to March 2024).

Thus, Guangdong Guanghong HoldingsLtd has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.4%.

View our latest analysis for Guangdong Guanghong HoldingsLtd

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

How Are Returns Trending?

In terms of Guangdong Guanghong HoldingsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.5% from 14% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Guangdong Guanghong HoldingsLtd's ROCE

In summary, we're somewhat concerned by Guangdong Guanghong HoldingsLtd's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Guangdong Guanghong HoldingsLtd we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Guangdong Guanghong HoldingsLtd 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.