Chengdu Guibao Science & TechnologyLtd (SZSE:300019) May Have Issues Allocating Its Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Chengdu Guibao Science & TechnologyLtd (SZSE:300019) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on Chengdu Guibao Science & TechnologyLtd is:

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

0.095 = CN¥252m ÷ (CN¥3.9b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

So, Chengdu Guibao Science & TechnologyLtd has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

See our latest analysis for Chengdu Guibao Science & TechnologyLtd

Above you can see how the current ROCE for Chengdu Guibao Science & TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Chengdu Guibao Science & TechnologyLtd .

So How Is Chengdu Guibao Science & TechnologyLtd's ROCE Trending?

On the surface, the trend of ROCE at Chengdu Guibao Science & TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.5% from 15% five years ago. However it looks like Chengdu Guibao Science & TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Chengdu Guibao Science & TechnologyLtd's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Chengdu Guibao Science & TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 100% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Chengdu Guibao Science & TechnologyLtd that we think you should be aware of.

While Chengdu Guibao Science & TechnologyLtd 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.