Returns On Capital At Guangdong Tengen Industrial GroupLtd (SZSE:003003) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to 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 Guangdong Tengen Industrial GroupLtd (SZSE:003003) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Guangdong Tengen Industrial GroupLtd, this is the formula:

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

0.053 = CN¥68m ÷ (CN¥1.7b - CN¥456m) (Based on the trailing twelve months to June 2024).

Thus, Guangdong Tengen Industrial GroupLtd has an ROCE of 5.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.

View our latest analysis for Guangdong Tengen Industrial GroupLtd

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

What Can We Tell From Guangdong Tengen Industrial GroupLtd's ROCE Trend?

In terms of Guangdong Tengen Industrial GroupLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.3%. 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.

Our Take On Guangdong Tengen Industrial GroupLtd's ROCE

In summary, we're somewhat concerned by Guangdong Tengen Industrial GroupLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 28% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Guangdong Tengen Industrial GroupLtd (1 can't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.