Guangdong AVCiT Technology Holding (SZSE:001229) Might Be Having Difficulty Using Its Capital Effectively

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Guangdong AVCiT Technology Holding (SZSE:001229) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Guangdong AVCiT Technology Holding:

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

0.078 = CN¥74m ÷ (CN¥990m - CN¥46m) (Based on the trailing twelve months to June 2024).

Therefore, Guangdong AVCiT Technology Holding has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 4.4%.

See our latest analysis for Guangdong AVCiT Technology Holding

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Guangdong AVCiT Technology Holding has performed in the past in other metrics, you can view this free graph of Guangdong AVCiT Technology Holding's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangdong AVCiT Technology Holding Tell Us?

On the surface, the trend of ROCE at Guangdong AVCiT Technology Holding doesn't inspire confidence. Around five years ago the returns on capital were 52%, but since then they've fallen to 7.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Guangdong AVCiT Technology Holding has done well to pay down its current liabilities to 4.6% 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.

The Key Takeaway

In summary, Guangdong AVCiT Technology Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 15% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong AVCiT Technology Holding has the makings of a multi-bagger.

Like most companies, Guangdong AVCiT Technology Holding does come with some risks, and we've found 1 warning sign that you should be aware of.

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.