Capital allocation trends at Guangdong Fenghua Advanced Technology (Holding) (SZSE:000636) are not ideal

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends to look out for. In a perfect world, we would want a company to invest more capital in its business and, ideally, the returns generated from that capital also increase. Essentially, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a compounding machine. However, after an investigation Guangdong Fenghua Advanced Technology (Holding) (SZSE:000636), we do not believe current trends fit the mold of a multi-bagger.

What is Return on Capital Employed (ROCE)?

For those who are unsure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. The formula for this calculation for Guangdong Fenghua Advanced Technology (Holding) is:

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

0.013 = CN¥167 million ÷ (CN¥16 billion – CN¥2.8 billion) (Based on the last twelve months ended June 2024).

So, Guangdong Fenghua Advanced Technology (Holding) has an ROCE of 1.3%. Ultimately, this is a low return and it is below the electronics industry average of 5.4%.

View our latest analysis for Guangdong Fenghua Advanced Technology (Holding).

Above you can see how Guangdong Fenghua Advanced Technology (Holding)’s current ROCE compares to its past returns on capital, but there’s only so much you can tell from the past. If you are interested, you can see the analyst forecasts in our free Analyst report for Guangdong Fenghua Advanced Technology (Holding).

The trend of ROCE

In terms of Guangdong Fenghua Advanced Technology (Holding)’s historical ROCE developments, the trend is not fantastic. Over the last five years, the return on capital has fallen to 1.3% from 18% five years ago. Although both sales and the amount of assets used in the company have increased, this could indicate that the company is investing in growth and the additional capital has led to a short-term decrease in ROCE. And if the increased capital generates additional returns, the company and thus the shareholders benefit in the long term.

The key takeaway

Although Guangdong Fenghua Advanced Technology (Holding)’s returns have fallen recently, we are pleased to see revenues rising and the company reinvesting in its operations. These trends are starting to be recognized by investors, as the stock has delivered a 20% gain to shareholders who have held it over the last five years. So if other fundamentals prove solid, this stock could still be an attractive investment opportunity.

Even if Guangdong Fenghua Advanced Technology (Holding) doesn’t shine too brightly in this regard, it is still worth seeing whether the company is trading at attractive prices. You can find out with us FREE intrinsic value estimate for 000636 on our platform.

If you want to look for solid companies with great earnings, check this out free List of companies with good balance sheets and impressive 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 positions in any stocks mentioned.