Guangdong Shenglu Telecommunication Tech (SZSE:002446) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Guangdong Shenglu Telecommunication Tech (SZSE:002446), so let's see why.

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)

0.019 = CN¥65m ÷ (CN¥4.3b - CN¥810m) (Based on the trailing twelve months to June 2024).

So, Guangdong Shenglu Telecommunication Tech has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.4%.

See 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, you can check out the forecasts from the analysts covering Guangdong Shenglu Telecommunication Tech for free.

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

In terms of Guangdong Shenglu Telecommunication Tech's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.6%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Guangdong Shenglu Telecommunication Tech to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 31% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Guangdong Shenglu Telecommunication Tech could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002446 on our platform quite valuable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.