Investors Could Be Concerned With 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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Greenland Technologies Holding (NASDAQ:GTEC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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%. On its own, that's a low figure but it's around the 11% average generated by the Machinery industry.
See our latest analysis for Greenland Technologies Holding
In the above chart we have measured Greenland Technologies Holding's prior ROCE against its prior performance, but the future is arguably more important. 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. Greenland Technologies Holding probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a related note, Greenland Technologies Holding has decreased its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Bottom Line On Greenland Technologies Holding's ROCE
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 64% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a final note, we've found 3 warning signs for Greenland Technologies Holding that we think you should be aware of.
While Greenland Technologies Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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