Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guangdong Huate Gas (SHSE:688268), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Guangdong Huate Gas:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = CN¥191m ÷ (CN¥3.2b - CN¥402m) (Based on the trailing twelve months to June 2023).
Thus, Guangdong Huate Gas has an ROCE of 6.8%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.9%.
Check out our latest analysis for Guangdong Huate Gas
In the above chart we have measured Guangdong Huate Gas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Guangdong Huate Gas here for free.
The Trend Of ROCE
In terms of Guangdong Huate Gas' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 6.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, Guangdong Huate Gas has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Guangdong Huate Gas' ROCE
To conclude, we've found that Guangdong Huate Gas is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last three years has been flat. Therefore based on the analysis done in this article, we don't think Guangdong Huate Gas has the makings of a multi-bagger.
Guangdong Huate Gas does have some risks though, and we've spotted 2 warning signs for Guangdong Huate Gas that you might be interested in.
While Guangdong Huate Gas 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.