Capital Allocation Trends At Hefei Gocom Information TechnologyLtd (SHSE:688367) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Hefei Gocom Information TechnologyLtd (SHSE:688367) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Hefei Gocom Information TechnologyLtd:

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

0.035 = CN¥20m ÷ (CN¥762m - CN¥193m) (Based on the trailing twelve months to December 2023).

Thus, Hefei Gocom Information TechnologyLtd has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

View our latest analysis for Hefei Gocom Information TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hefei Gocom Information TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Hefei Gocom Information TechnologyLtd's past further, check out this free graph covering Hefei Gocom Information TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Hefei Gocom Information TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Hefei Gocom Information TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.5% from 5.3% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line On Hefei Gocom Information TechnologyLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Hefei Gocom Information TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 35% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Hefei Gocom Information TechnologyLtd, we've discovered 3 warning signs 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.