Guangdong Aofei Data Technology (SZSE:300738) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Guangdong Aofei Data Technology (SZSE:300738) and its ROCE trend, we weren't exactly thrilled.

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 Guangdong Aofei Data Technology is:

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

0.041 = CN¥285m ÷ (CN¥9.2b - CN¥2.3b) (Based on the trailing twelve months to March 2024).

Thus, Guangdong Aofei Data Technology has an ROCE of 4.1%. Even though it's in line with the industry average of 3.9%, it's still a low return by itself.

Check out our latest analysis for Guangdong Aofei Data Technology

In the above chart we have measured Guangdong Aofei Data Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Guangdong Aofei Data Technology for free.

The Trend Of ROCE

In terms of Guangdong Aofei Data Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.6% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Guangdong Aofei Data Technology has done well to pay down its current liabilities to 25% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Guangdong Aofei Data Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Aofei Data Technology is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 125% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing, we've spotted 2 warning signs facing Guangdong Aofei Data Technology that you might find interesting.

While Guangdong Aofei Data Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com