Guangzhou Hengyun Enterprises Holding (SZSE:000531) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Guangzhou Hengyun Enterprises Holding (SZSE:000531) 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. To calculate this metric for Guangzhou Hengyun Enterprises Holding, this is the formula:

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

0.023 = CN¥331m ÷ (CN¥19b - CN¥4.8b) (Based on the trailing twelve months to June 2024).

So, Guangzhou Hengyun Enterprises Holding has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.6%.

See our latest analysis for Guangzhou Hengyun Enterprises Holding

Above you can see how the current ROCE for Guangzhou Hengyun Enterprises Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Guangzhou Hengyun Enterprises Holding .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 7.6% five years ago, while capital employed has grown 187%. Usually this isn't ideal, but given Guangzhou Hengyun Enterprises Holding conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangzhou Hengyun Enterprises Holding might not have received a full period of earnings contribution from it.

On a side note, Guangzhou Hengyun Enterprises Holding has done well to pay down its current liabilities to 25% 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guangzhou Hengyun Enterprises Holding. These trends are starting to be recognized by investors since the stock has delivered a 8.0% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One final note, you should learn about the 4 warning signs we've spotted with Guangzhou Hengyun Enterprises Holding (including 1 which is significant) .

While Guangzhou Hengyun Enterprises Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.