To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Gaona Aero Material (SZSE:300034) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Gaona Aero Material is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥454m ÷ (CN¥7.1b - CN¥2.9b) (Based on the trailing twelve months to September 2023).
Therefore, Gaona Aero Material has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 4.7% generated by the Aerospace & Defense industry.
Check out our latest analysis for Gaona Aero Material
Above you can see how the current ROCE for Gaona Aero Material compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Gaona Aero Material.
What Can We Tell From Gaona Aero Material's ROCE Trend?
The trends we've noticed at Gaona Aero Material are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 185%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 40% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Bottom Line On Gaona Aero Material's ROCE
In summary, it's great to see that Gaona Aero Material can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 295% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 1 warning sign for Gaona Aero Material you'll probably want to know about.
While Gaona Aero Material 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.