Guangdong Advertising GroupLtd's (SZSE:002400) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Guangdong Advertising GroupLtd (SZSE:002400), we weren't too hopeful.

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. To calculate this metric for Guangdong Advertising GroupLtd, this is the formula:

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

0.032 = CN¥167m ÷ (CN¥8.8b - CN¥3.6b) (Based on the trailing twelve months to March 2024).

So, Guangdong Advertising GroupLtd has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Media industry average of 4.0%.

Check out our latest analysis for Guangdong Advertising GroupLtd

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

So How Is Guangdong Advertising GroupLtd's ROCE Trending?

In terms of Guangdong Advertising GroupLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Advertising GroupLtd to turn into a multi-bagger.

Another thing to note, Guangdong Advertising GroupLtd has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Guangdong Advertising GroupLtd's ROCE

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. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 73% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing Guangdong Advertising GroupLtd that you might find interesting.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.