We Like These Underlying Return On Capital Trends At Guangdong Silver Age Sci & TechLtd (SZSE:300221)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Guangdong Silver Age Sci & TechLtd (SZSE:300221) so let's look a bit deeper.

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

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. Analysts use this formula to calculate it for Guangdong Silver Age Sci & TechLtd:

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

0.039 = CN¥56m ÷ (CN¥1.8b - CN¥416m) (Based on the trailing twelve months to December 2023).

Therefore, Guangdong Silver Age Sci & TechLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

View our latest analysis for Guangdong Silver Age Sci & TechLtd

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 Silver Age Sci & TechLtd has performed in the past in other metrics, you can view this free graph of Guangdong Silver Age Sci & TechLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

Guangdong Silver Age Sci & TechLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 3.9% on its capital. While returns have increased, the amount of capital employed by Guangdong Silver Age Sci & TechLtd has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, 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.

The Bottom Line

To bring it all together, Guangdong Silver Age Sci & TechLtd has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 25% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 2 warning signs with Guangdong Silver Age Sci & TechLtd and understanding them should be part of your investment process.

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.