Guangdong Tapai Group (SZSE:002233) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Tapai Group (SZSE:002233), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Guangdong Tapai Group is:

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

0.061 = CN¥762m ÷ (CN¥13b - CN¥968m) (Based on the trailing twelve months to March 2024).

So, Guangdong Tapai Group has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

Check out our latest analysis for Guangdong Tapai Group

In the above chart we have measured Guangdong Tapai Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guangdong Tapai Group .

What Can We Tell From Guangdong Tapai Group's ROCE Trend?

On the surface, the trend of ROCE at Guangdong Tapai Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.1% from 22% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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 Tapai Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Guangdong Tapai Group have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 16% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with Guangdong Tapai Group and understanding it should be part of your investment process.

While Guangdong Tapai Group 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.