What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Guangdong Advertising GroupLtd (SZSE:002400) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Guangdong Advertising GroupLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥431m ÷ (CN¥8.7b - CN¥3.4b) (Based on the trailing twelve months to September 2023).
So, Guangdong Advertising GroupLtd has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Media industry average of 4.9%.
Check out our latest analysis for Guangdong Advertising GroupLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Advertising GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Guangdong Advertising GroupLtd, check out these free graphs here.
So How Is Guangdong Advertising GroupLtd's ROCE Trending?
Shareholders will be relieved that Guangdong Advertising GroupLtd has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 8.2%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
What We Can Learn From Guangdong Advertising GroupLtd's ROCE
As discussed above, Guangdong Advertising GroupLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 82% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Guangdong Advertising GroupLtd can keep these trends up, it could have a bright future ahead.
If you want to continue researching Guangdong Advertising GroupLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Guangdong Advertising GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.