Capital Allocation Trends At Guangdong Fenghua Advanced Technology (Holding) (SZSE:000636) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Guangdong Fenghua Advanced Technology (Holding) (SZSE:000636), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Guangdong Fenghua Advanced Technology (Holding) is:

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

0.013 = CN¥167m ÷ (CN¥16b - CN¥2.8b) (Based on the trailing twelve months to June 2024).

So, Guangdong Fenghua Advanced Technology (Holding) has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

See our latest analysis for Guangdong Fenghua Advanced Technology (Holding)

Above you can see how the current ROCE for Guangdong Fenghua Advanced Technology (Holding) 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 Guangdong Fenghua Advanced Technology (Holding) .

The Trend Of ROCE

In terms of Guangdong Fenghua Advanced Technology (Holding)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.3% from 18% five years ago. 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.

The Key Takeaway

While returns have fallen for Guangdong Fenghua Advanced Technology (Holding) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 20% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

While Guangdong Fenghua Advanced Technology (Holding) doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 000636 on our platform.

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.