Guoanda (SZSE:300902) Will Want To Turn Around Its Return Trends

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Guoanda (SZSE:300902) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guoanda, this is the formula:

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

0.011 = CN¥9.5m ÷ (CN¥946m - CN¥94m) (Based on the trailing twelve months to September 2024).

So, Guoanda has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.6%.

Check out our latest analysis for Guoanda

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're interested in investigating Guoanda's past further, check out this free graph covering Guoanda's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guoanda Tell Us?

When we looked at the ROCE trend at Guoanda, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.1% from 24% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Guoanda's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guoanda. These growth trends haven't led to growth returns though, since the stock has fallen 30% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Guoanda does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are significant...

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.