If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating GD Power DevelopmentLtd (SHSE:600795), we don't think it's current trends fit the mold of a multi-bagger.
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 GD Power DevelopmentLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = CN¥7.7b ÷ (CN¥412b - CN¥125b) (Based on the trailing twelve months to June 2022).
Therefore, GD Power DevelopmentLtd has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.3%.
See our latest analysis for GD Power DevelopmentLtd
SHSE:600795 Return on Capital Employed September 15th 2022Above you can see how the current ROCE for GD Power DevelopmentLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering GD Power DevelopmentLtd here for free.
So How Is GD Power DevelopmentLtd's ROCE Trending?
On the surface, the trend of ROCE at GD Power DevelopmentLtd doesn't inspire confidence. Around five years ago the returns on capital were 5.1%, but since then they've fallen to 2.7%. However it looks like GD Power DevelopmentLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by GD Power DevelopmentLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 49% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Like most companies, GD Power DevelopmentLtd does come with some risks, and we've found 1 warning sign that you should be aware of.
While GD Power DevelopmentLtd 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.