Returns On Capital At Guo Tai Epoint SoftwareLtd (SHSE:688232) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Guo Tai Epoint SoftwareLtd (SHSE:688232) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Guo Tai Epoint SoftwareLtd, this is the formula:

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

0.016 = CN¥93m ÷ (CN¥6.5b - CN¥871m) (Based on the trailing twelve months to March 2024).

Thus, Guo Tai Epoint SoftwareLtd has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Software industry average of 3.0%.

Check out our latest analysis for Guo Tai Epoint SoftwareLtd

In the above chart we have measured Guo Tai Epoint SoftwareLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guo Tai Epoint SoftwareLtd .

What Does the ROCE Trend For Guo Tai Epoint SoftwareLtd Tell Us?

On the surface, the trend of ROCE at Guo Tai Epoint SoftwareLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 38% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Guo Tai Epoint SoftwareLtd has done well to pay down its current liabilities to 13% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

We're a bit apprehensive about Guo Tai Epoint SoftwareLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last year have experienced a 59% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 3 warning signs facing Guo Tai Epoint SoftwareLtd 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.

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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.

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