Capital Allocation Trends At Guangdong New Grand Long Packing (SZSE:002836) Aren't Ideal

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Guangdong New Grand Long Packing (SZSE:002836), the trends above didn't look too great.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guangdong New Grand Long Packing is:

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

0.024 = CN¥8.6m ÷ (CN¥433m - CN¥68m) (Based on the trailing twelve months to September 2023).

So, Guangdong New Grand Long Packing has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Packaging industry average of 4.4%.

View our latest analysis for Guangdong New Grand Long Packing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong New Grand Long Packing's ROCE against it's prior returns. If you're interested in investigating Guangdong New Grand Long Packing's past further, check out this free graph covering Guangdong New Grand Long Packing's past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Guangdong New Grand Long Packing. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Guangdong New Grand Long Packing to turn into a multi-bagger.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Guangdong New Grand Long Packing does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

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.