Returns On Capital At Guangdong Fenghua Advanced Technology (Holding) (SZSE:000636) Paint A Concerning Picture

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Guangdong Fenghua Advanced Technology (Holding) (SZSE:000636), 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. To calculate this metric for Guangdong Fenghua Advanced Technology (Holding), this is the formula:

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

0.003 = CN¥39m ÷ (CN¥16b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

Therefore, Guangdong Fenghua Advanced Technology (Holding) has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.

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

In the above chart we have measured Guangdong Fenghua Advanced Technology (Holding)'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 Fenghua Advanced Technology (Holding) for free.

How Are Returns Trending?

In terms of Guangdong Fenghua Advanced Technology (Holding)'s historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 22%, but since then they've fallen to 0.3%. 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 Bottom Line On Guangdong Fenghua Advanced Technology (Holding)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Fenghua Advanced Technology (Holding) is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 5.6% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

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.

While Guangdong Fenghua Advanced Technology (Holding) 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.