Guangzhou Hengyun Enterprises Holding (SZSE:000531) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Guangzhou Hengyun Enterprises Holding (SZSE:000531), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Guangzhou Hengyun Enterprises Holding:

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

0.023 = CN¥358m ÷ (CN¥20b - CN¥5.2b) (Based on the trailing twelve months to March 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 5.9%.

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 .

What Does the ROCE Trend For Guangzhou Hengyun Enterprises Holding Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 7.4% five years ago, while capital employed has grown 204%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Guangzhou Hengyun Enterprises Holding probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Guangzhou Hengyun Enterprises Holding has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From Guangzhou Hengyun Enterprises Holding's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guangzhou Hengyun Enterprises Holding is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 7.9% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing Guangzhou Hengyun Enterprises Holding we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.