GL TechLtd (SZSE:300480) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at GL TechLtd (SZSE:300480), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for GL TechLtd, this is the formula:

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

0.04 = CN¥76m ÷ (CN¥2.1b - CN¥194m) (Based on the trailing twelve months to December 2023).

So, GL TechLtd has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.3%.

View our latest analysis for GL TechLtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GL TechLtd.

What Does the ROCE Trend For GL TechLtd Tell Us?

On the surface, the trend of ROCE at GL TechLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.0% from 6.0% five years ago. However it looks like GL TechLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

In Conclusion...

To conclude, we've found that GL TechLtd is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 148% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with GL TechLtd (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.