Guangdong Aofei Data Technology (SZSE:300738) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Guangdong Aofei Data Technology (SZSE:300738), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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¥327m ÷ (CN¥11b - CN¥2.9b) (Based on the trailing twelve months to September 2024).

Therefore, Guangdong Aofei Data Technology has an ROCE of 4.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.7%.

View 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.

What Does the ROCE Trend For Guangdong Aofei Data Technology Tell Us?

On the surface, the trend of ROCE at Guangdong Aofei Data Technology doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 4.1%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Guangdong Aofei Data Technology's ROCE

While returns have fallen for Guangdong Aofei Data Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 182% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 4 warning signs we've spotted with Guangdong Aofei Data Technology (including 2 which are concerning) .

While Guangdong Aofei Data Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.