Guangdong Shenglu Telecommunication Tech (SZSE:002446) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Guangdong Shenglu Telecommunication Tech (SZSE:002446) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Guangdong Shenglu Telecommunication Tech:

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

0.063 = CN¥221m ÷ (CN¥4.3b - CN¥774m) (Based on the trailing twelve months to September 2023).

So, Guangdong Shenglu Telecommunication Tech has an ROCE of 6.3%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 4.6%.

View our latest analysis for Guangdong Shenglu Telecommunication Tech

Above you can see how the current ROCE for Guangdong Shenglu Telecommunication Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangdong Shenglu Telecommunication Tech .

What Does the ROCE Trend For Guangdong Shenglu Telecommunication Tech Tell Us?

Guangdong Shenglu Telecommunication Tech is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 94% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Guangdong Shenglu Telecommunication Tech's ROCE

In summary, we're delighted to see that Guangdong Shenglu Telecommunication Tech has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 43% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 002446 that compares the share price and estimated value.

While Guangdong Shenglu Telecommunication Tech 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.