The return trends for Guangzhou Tech-Long Packaging MachineryLtd (SZSE:002209) look promising

Finding a company that has the potential to grow significantly is not easy, but it is possible if we look at a few key financial metrics. Ideally, a company exhibits two trends; firstly, a growing one return on capital employed (ROCE) and secondly an increase Crowd of the capital employed. When you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With this in mind, we have noticed some promising trends Guangzhou Tech-Long Packaging MachineryLtd (SZSE:002209) So let’s look a little deeper.

Understand return on capital employed (ROCE).

If you’ve never worked with ROCE before, it measures the “return” (profit before taxes) that a company generates from the capital employed in its business. Analysts use this formula to calculate it for Guangzhou Tech-Long Packaging MachineryLtd:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.034 = CN¥28 million ÷ (CN¥2.5 billion – CN¥1.6 billion) (Based on the last twelve months ending September 2024).

So, Guangzhou Tech-Long Packaging MachineryLtd has an ROCE of 3.4%. In absolute terms, this is a low return and is also below the machinery industry average of 5.2%.

Check out our latest analysis for Guangzhou Tech-Long Packaging MachineryLtd

Historical performance is a good starting point when researching a stock. Therefore, above you can see Guangzhou Tech-Long Packaging MachineryLtd’s ROCE compared to its past returns. If you are interested in further investigating Guangzhou Tech-Long Packaging MachineryLtd’s past, check this out free Chart covering Guangzhou Tech-Long Packaging MachineryLtd’s historical earnings, revenue and cash flow.

The trend of ROCE

Shareholders will be relieved that Guangzhou Tech-Long Packaging MachineryLtd has broken into profit. The company now earns 3.4% of its capital because it was making losses five years ago. Additionally, what’s interesting is that the amount of capital employed has remained constant, meaning the company hasn’t had to invest additional money to achieve these higher returns. Since there is no significant increase in capital employed, it is worth knowing what the company plans to do in the future in terms of reinvesting and growing the business. Because in the end, a company can only become so efficient.

As a side note, we noted that the improvement in ROCE appears to be partly due to an increase in current liabilities. Current liabilities have increased to 67% of total assets, meaning the company is now more heavily financed by suppliers or short-term creditors. Given the fairly high ratio, we would like to remind investors that short-term liabilities at this level in certain companies may pose certain risks.

What we can learn from Guangzhou Tech-Long Packaging MachineryLtd’s ROCE

All in all, Guangzhou Tech-Long Packaging MachineryLtd has done well to increase returns on capital employed. And investors seem to expect more of the same in the future, as the stock has rewarded shareholders with a return of 41% over the last five years. Given that the stock is showing promising trends, it’s worth further researching the company to see if these trends are likely to continue.

Although Guangzhou Tech-Long Packaging MachineryLtd looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002209 helps visualize whether it is currently trading at a fair price.

For those who like to invest solid companies, Check this out free List of companies with solid balance sheets and high returns on equity.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.