There Are Reasons To Feel Uneasy About Greenland Technologies Holding's (NASDAQ:GTEC) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Greenland Technologies Holding (NASDAQ:GTEC), it didn't seem to tick all of these boxes.

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 Greenland Technologies Holding is:

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

0.086 = US$7.5m ÷ (US$158m - US$70m) (Based on the trailing twelve months to September 2022).

Thus, Greenland Technologies Holding has an ROCE of 8.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

View our latest analysis for Greenland Technologies Holding

Above you can see how the current ROCE for Greenland Technologies Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We weren't thrilled with the trend because Greenland Technologies Holding's ROCE has reduced by 35% over the last four years, while the business employed 85% more capital. That being said, Greenland Technologies Holding raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Greenland Technologies Holding's earnings and if they change as a result from the capital raise.

On a side note, Greenland Technologies Holding has done well to pay down its current liabilities to 45% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Greenland Technologies Holding's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 45% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

One more thing, we've spotted 3 warning signs facing Greenland Technologies Holding that you might find interesting.

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.