Investors Met With Slowing Returns on Capital At Guangdong Shunkong DevelopmentLtd (SZSE:003039)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So, when we ran our eye over Guangdong Shunkong DevelopmentLtd's (SZSE:003039) trend of ROCE, we liked what we saw.

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. The formula for this calculation on Guangdong Shunkong DevelopmentLtd is:

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

0.10 = CN¥428m ÷ (CN¥5.3b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

So, Guangdong Shunkong DevelopmentLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 6.2% it's much better.

Check out our latest analysis for Guangdong Shunkong DevelopmentLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Guangdong Shunkong DevelopmentLtd's past further, check out this free graph covering Guangdong Shunkong DevelopmentLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangdong Shunkong DevelopmentLtd Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 54% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 22% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Guangdong Shunkong DevelopmentLtd's ROCE

The main thing to remember is that Guangdong Shunkong DevelopmentLtd has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 70% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a final note, we've found 1 warning sign for Guangdong Shunkong DevelopmentLtd that we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.