Guangzhou Guanggang Gases & EnergyLtd (SHSE:688548) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Guangzhou Guanggang Gases & EnergyLtd (SHSE:688548) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 Guangzhou Guanggang Gases & EnergyLtd, this is the formula:

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

0.037 = CN¥248m ÷ (CN¥8.0b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

So, Guangzhou Guanggang Gases & EnergyLtd has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.

View our latest analysis for Guangzhou Guanggang Gases & EnergyLtd

Above you can see how the current ROCE for Guangzhou Guanggang Gases & EnergyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Guanggang Gases & EnergyLtd .

What Can We Tell From Guangzhou Guanggang Gases & EnergyLtd's ROCE Trend?

In terms of Guangzhou Guanggang Gases & EnergyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.3% over the last four 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Guangzhou Guanggang Gases & EnergyLtd's ROCE

In summary, Guangzhou Guanggang Gases & EnergyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 14% over the last year, investors may not be too optimistic on this trend improving either. 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.

Guangzhou Guanggang Gases & EnergyLtd does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.