We Like These Underlying Return On Capital Trends At Guangzhou Tinci Materials Technology (SZSE:002709)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Guangzhou Tinci Materials Technology (SZSE:002709) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Guangzhou Tinci Materials Technology, this is the formula:

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

0.089 = CN¥1.6b ÷ (CN¥24b - CN¥5.7b) (Based on the trailing twelve months to March 2024).

Therefore, Guangzhou Tinci Materials Technology has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

Check out our latest analysis for Guangzhou Tinci Materials Technology

Above you can see how the current ROCE for Guangzhou Tinci Materials Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangzhou Tinci Materials Technology for free.

What Does the ROCE Trend For Guangzhou Tinci Materials Technology Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.9%. The amount of capital employed has increased too, by 482%. So we're very much inspired by what we're seeing at Guangzhou Tinci Materials Technology thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 24%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

To sum it up, Guangzhou Tinci Materials Technology has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 354% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Guangzhou Tinci Materials Technology, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Guangzhou Tinci Materials Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.