Returns On Capital At Guangzhou Devotion Thermal Technology (SZSE:300335) Paint A Concerning Picture

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Guangzhou Devotion Thermal Technology (SZSE:300335), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Guangzhou Devotion Thermal Technology is:

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

0.052 = CN¥111m ÷ (CN¥2.8b - CN¥670m) (Based on the trailing twelve months to June 2024).

So, Guangzhou Devotion Thermal Technology has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 5.6%.

See our latest analysis for Guangzhou Devotion Thermal Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Devotion Thermal Technology's ROCE against it's prior returns. If you're interested in investigating Guangzhou Devotion Thermal Technology's past further, check out this free graph covering Guangzhou Devotion Thermal Technology's past earnings, revenue and cash flow.

What Can We Tell From Guangzhou Devotion Thermal Technology's ROCE Trend?

We are a bit worried about the trend of returns on capital at Guangzhou Devotion Thermal Technology. Unfortunately the returns on capital have diminished from the 8.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangzhou Devotion Thermal Technology becoming one if things continue as they have.

What We Can Learn From Guangzhou Devotion Thermal Technology's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Guangzhou Devotion Thermal Technology does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

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.