Glodon (SZSE:002410) 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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Glodon (SZSE:002410) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Glodon is:

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

0.024 = CN¥161m ÷ (CN¥10.0b - CN¥3.3b) (Based on the trailing twelve months to September 2024).

So, Glodon has an ROCE of 2.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.3%.

See our latest analysis for Glodon

Above you can see how the current ROCE for Glodon compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Glodon .

So How Is Glodon's ROCE Trending?

When we looked at the ROCE trend at Glodon, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.4% from 7.0% five years ago. 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.

In Conclusion...

In summary, we're somewhat concerned by Glodon's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 47% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Glodon does have some risks though, and we've spotted 3 warning signs for Glodon that you might be interested in.

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.