There Are Reasons To Feel Uneasy About GCL Energy TechnologyLtd's (SZSE:002015) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at GCL Energy TechnologyLtd (SZSE:002015), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 GCL Energy TechnologyLtd, this is the formula:

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

0.041 = CN¥1.1b ÷ (CN¥39b - CN¥12b) (Based on the trailing twelve months to June 2024).

Thus, GCL Energy TechnologyLtd has an ROCE of 4.1%. 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 GCL Energy TechnologyLtd

In the above chart we have measured GCL Energy TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for GCL Energy TechnologyLtd .

What Can We Tell From GCL Energy TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at GCL Energy TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 4.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From GCL Energy TechnologyLtd's ROCE

In summary, we're somewhat concerned by GCL Energy TechnologyLtd's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 40% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know about the risks facing GCL Energy TechnologyLtd, we've discovered 3 warning signs that you should be aware of.

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.