We Like These Underlying Return On Capital Trends At Greenland Technologies Holding (NASDAQ:GTEC)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Greenland Technologies Holding (NASDAQ:GTEC) looks quite promising in regards to its trends of return on capital.

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 Greenland Technologies Holding, this is the formula:

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

0.13 = US$6.7m ÷ (US$132m - US$79m) (Based on the trailing twelve months to December 2020).

Thus, Greenland Technologies Holding has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Machinery industry.

Check out our latest analysis for Greenland Technologies Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Greenland Technologies Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Greenland Technologies Holding, check out these free graphs here.

What Can We Tell From Greenland Technologies Holding's ROCE Trend?

Greenland Technologies Holding has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses three years ago, but has managed to turn it around and as we saw earlier is now earning 13%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a separate but related note, it's important to know that Greenland Technologies Holding has a current liabilities to total assets ratio of 60%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Greenland Technologies Holding's ROCE

To bring it all together, Greenland Technologies Holding has done well to increase the returns it's generating from its capital employed. And a remarkable 340% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Greenland Technologies Holding can keep these trends up, it could have a bright future ahead.

On a final note, we found 5 warning signs for Greenland Technologies Holding (1 doesn't sit too well with us) you should be aware of.

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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