Be Wary Of Guangxi Guiguan Electric PowerCo.Ltd (SHSE:600236) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Guangxi Guiguan Electric PowerCo.Ltd (SHSE:600236), we weren't too hopeful.

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 Guangxi Guiguan Electric PowerCo.Ltd, this is the formula:

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

0.065 = CN¥2.1b ÷ (CN¥48b - CN¥16b) (Based on the trailing twelve months to March 2024).

So, Guangxi Guiguan Electric PowerCo.Ltd has an ROCE of 6.5%. On its own, that's a low figure but it's around the 5.9% average generated by the Renewable Energy industry.

See our latest analysis for Guangxi Guiguan Electric PowerCo.Ltd

In the above chart we have measured Guangxi Guiguan Electric PowerCo.Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guangxi Guiguan Electric PowerCo.Ltd .

What Does the ROCE Trend For Guangxi Guiguan Electric PowerCo.Ltd Tell Us?

In terms of Guangxi Guiguan Electric PowerCo.Ltd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangxi Guiguan Electric PowerCo.Ltd becoming one if things continue as they have.

On a side note, Guangxi Guiguan Electric PowerCo.Ltd's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Guangxi Guiguan Electric PowerCo.Ltd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 104%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 3 warning signs we've spotted with Guangxi Guiguan Electric PowerCo.Ltd (including 2 which are concerning) .

While Guangxi Guiguan Electric PowerCo.Ltd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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