How Has GDH Guangnan (Holdings) (HKG:1203) Allocated Its Capital?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at GDH Guangnan (Holdings) (HKG:1203), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for GDH Guangnan (Holdings):

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

0.016 = HK$43m ÷ (HK$3.2b - HK$592m) (Based on the trailing twelve months to June 2020).

Therefore, GDH Guangnan (Holdings) has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.5%.

See our latest analysis for GDH Guangnan (Holdings)

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'd like to look at how GDH Guangnan (Holdings) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about GDH Guangnan (Holdings), given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect GDH Guangnan (Holdings) to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that GDH Guangnan (Holdings) is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing GDH Guangnan (Holdings) we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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