If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think GuoCheng MiningLTD (SZSE:000688) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for GuoCheng MiningLTD, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0035 = CN¥20m ÷ (CN¥8.1b - CN¥2.5b) (Based on the trailing twelve months to June 2023).
So, GuoCheng MiningLTD has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.4%.
Check out our latest analysis for GuoCheng MiningLTD
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating GuoCheng MiningLTD's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From GuoCheng MiningLTD's ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 23% five years ago, while capital employed has grown 138%. That being said, GuoCheng MiningLTD raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence GuoCheng MiningLTD might not have received a full period of earnings contribution from it.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On GuoCheng MiningLTD's ROCE
We're a bit apprehensive about GuoCheng MiningLTD because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
GuoCheng MiningLTD does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
While GuoCheng MiningLTD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.