Some Investors May Be Worried About GuangDong GenSho LogisticsLTD's (SHSE:603813) Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think GuangDong GenSho LogisticsLTD (SHSE:603813) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for GuangDong GenSho LogisticsLTD:

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

0.0032 = CN¥3.9m ÷ (CN¥1.3b - CN¥140m) (Based on the trailing twelve months to June 2024).

So, GuangDong GenSho LogisticsLTD has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 4.3%.

View our latest analysis for GuangDong GenSho LogisticsLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for GuangDong GenSho LogisticsLTD's 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 GenSho LogisticsLTD.

What Does the ROCE Trend For GuangDong GenSho LogisticsLTD Tell Us?

In terms of GuangDong GenSho LogisticsLTD's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 0.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 GenSho LogisticsLTD has done well to pay down its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On GuangDong GenSho LogisticsLTD's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for GuangDong GenSho LogisticsLTD have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 45% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 2 warning signs for GuangDong GenSho LogisticsLTD (1 is a bit concerning) you should be aware of.

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.