GuangDong ShaoNeng Group (SZSE:000601) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think GuangDong ShaoNeng Group (SZSE:000601) 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)

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 GuangDong ShaoNeng Group:

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

0.0024 = CN¥26m ÷ (CN¥14b - CN¥3.0b) (Based on the trailing twelve months to September 2023).

Thus, GuangDong ShaoNeng Group has an ROCE of 0.2%. 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 GuangDong ShaoNeng Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for GuangDong ShaoNeng Group's ROCE against it's prior returns. If you'd like to look at how GuangDong ShaoNeng Group has performed in the past in other metrics, you can view this free graph of GuangDong ShaoNeng Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For GuangDong ShaoNeng Group Tell Us?

When we looked at the ROCE trend at GuangDong ShaoNeng Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.2% from 6.1% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On GuangDong ShaoNeng Group's ROCE

While returns have fallen for GuangDong ShaoNeng Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching GuangDong ShaoNeng Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.