Here's What's Concerning About Guangdong Green Precision Components' (SZSE:300968) Returns On Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Guangdong Green Precision Components (SZSE:300968) 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 Green Precision Components:

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

0.014 = CN¥26m ÷ (CN¥2.2b - CN¥314m) (Based on the trailing twelve months to September 2023).

Therefore, Guangdong Green Precision Components has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Tech industry average of 6.2%.

See our latest analysis for Guangdong Green Precision Components

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Green Precision Components' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangdong Green Precision Components.

What Does the ROCE Trend For Guangdong Green Precision Components Tell Us?

On the surface, the trend of ROCE at Guangdong Green Precision Components doesn't inspire confidence. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 1.4%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Guangdong Green Precision Components has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Guangdong Green Precision Components' ROCE

In summary, we're somewhat concerned by Guangdong Green Precision Components' diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last year. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Guangdong Green Precision Components (including 2 which can't be ignored) .

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.