Investors Could Be Concerned With GuangDong ShaoNeng Group's (SZSE:000601) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at GuangDong ShaoNeng Group (SZSE:000601) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for GuangDong ShaoNeng Group, this is the formula:

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

0.013 = CN¥134m ÷ (CN¥13b - CN¥2.8b) (Based on the trailing twelve months to June 2024).

So, GuangDong ShaoNeng Group has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.6%.

Check out 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're interested in investigating GuangDong ShaoNeng Group's past further, check out this free graph covering GuangDong ShaoNeng Group's past earnings, revenue and cash flow.

So How Is GuangDong ShaoNeng Group's ROCE Trending?

When we looked at the ROCE trend at GuangDong ShaoNeng Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.4% over the last five years. However it looks like GuangDong ShaoNeng Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, GuangDong ShaoNeng Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 31% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing GuangDong ShaoNeng Group, we've discovered 2 warning signs that you should be aware of.

While GuangDong ShaoNeng Group 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.