Geovis TechnologyLtd (SHSE:688568) Could Be Struggling To Allocate Capital

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Geovis TechnologyLtd (SHSE:688568), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Geovis TechnologyLtd is:

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

0.098 = CN¥423m ÷ (CN¥7.3b - CN¥2.9b) (Based on the trailing twelve months to September 2024).

Thus, Geovis TechnologyLtd has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 2.6% generated by the Software industry, it's much better.

Check out our latest analysis for Geovis TechnologyLtd

Above you can see how the current ROCE for Geovis TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Geovis TechnologyLtd .

What Does the ROCE Trend For Geovis TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Geovis TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 35% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Geovis TechnologyLtd has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. 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.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Geovis TechnologyLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 81% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Geovis TechnologyLtd, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.