Guangdong Tloong Technology GroupLtd (SZSE:300063) Might Be Having Difficulty Using Its Capital Effectively

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Guangdong Tloong Technology GroupLtd (SZSE:300063) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Guangdong Tloong Technology GroupLtd is:

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

0.034 = CN¥65m ÷ (CN¥3.0b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Therefore, Guangdong Tloong Technology GroupLtd has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Guangdong Tloong Technology 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're interested in investigating Guangdong Tloong Technology GroupLtd's past further, check out this free graph covering Guangdong Tloong Technology GroupLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangdong Tloong Technology GroupLtd Tell Us?

On the surface, the trend of ROCE at Guangdong Tloong Technology GroupLtd doesn't inspire confidence. Around five years ago the returns on capital were 7.4%, but since then they've fallen to 3.4%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Guangdong Tloong Technology GroupLtd has done well to pay down its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Guangdong Tloong Technology GroupLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Guangdong Tloong Technology GroupLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 86% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Guangdong Tloong Technology GroupLtd (of which 1 makes us a bit uncomfortable!) that you should know about.

While Guangdong Tloong Technology GroupLtd 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.