The Returns On Capital At Guangdong Advertising GroupLtd (SZSE:002400) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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.

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 Advertising GroupLtd, this is the formula:

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

0.032 = CN¥168m ÷ (CN¥9.2b - CN¥3.9b) (Based on the trailing twelve months to September 2024).

So, Guangdong Advertising GroupLtd has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Media industry average of 5.2%.

See our latest analysis for Guangdong Advertising 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 Advertising GroupLtd has performed in the past in other metrics, you can view this free graph of Guangdong Advertising GroupLtd's past earnings, revenue and cash flow.

So How Is Guangdong Advertising GroupLtd's ROCE Trending?

We are a bit worried about the trend of returns on capital at Guangdong Advertising GroupLtd. About five years ago, returns on capital were 8.3%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangdong Advertising GroupLtd becoming one if things continue as they have.

On a side note, Guangdong Advertising GroupLtd's current liabilities are still rather high at 43% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Guangdong Advertising GroupLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Since the stock has skyrocketed 196% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Guangdong Advertising GroupLtd we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Guangdong Advertising 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.