Guangdong Insight Brand Marketing GroupLtd (SZSE:300781) Might Be Having Difficulty Using Its Capital Effectively

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Guangdong Insight Brand Marketing GroupLtd (SZSE:300781) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guangdong Insight Brand Marketing GroupLtd, this is the formula:

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

0.049 = CN¥39m ÷ (CN¥1.0b - CN¥248m) (Based on the trailing twelve months to September 2023).

Therefore, Guangdong Insight Brand Marketing GroupLtd has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

View our latest analysis for Guangdong Insight Brand Marketing GroupLtd

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

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 173%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangdong Insight Brand Marketing GroupLtd might not have received a full period of earnings contribution from it.

The Key Takeaway

In summary, we're somewhat concerned by Guangdong Insight Brand Marketing GroupLtd's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 192% over the last three years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Guangdong Insight Brand Marketing GroupLtd does have some risks though, and we've spotted 2 warning signs for Guangdong Insight Brand Marketing GroupLtd that you might be interested in.

While Guangdong Insight Brand Marketing 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.

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.