If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Guangdong Insight Brand Marketing GroupLtd (SZSE:300781), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Guangdong Insight Brand Marketing GroupLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CN¥39m ÷ (CN¥1.0b - CN¥248m) (Based on the trailing twelve months to September 2023).
So, Guangdong Insight Brand Marketing GroupLtd has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.
Check out our latest analysis for Guangdong Insight Brand Marketing GroupLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Insight Brand Marketing GroupLtd's ROCE against it's prior returns. If you're interested in investigating Guangdong Insight Brand Marketing GroupLtd's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 173%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Guangdong Insight Brand Marketing GroupLtd's earnings and if they change as a result from the capital raise.
What We Can Learn From Guangdong Insight Brand Marketing GroupLtd's ROCE
We're a bit apprehensive about Guangdong Insight Brand Marketing GroupLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 98% return to shareholders over the last three years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing to note, we've identified 2 warning signs with Guangdong Insight Brand Marketing GroupLtd and understanding these should be part of your investment process.
While Guangdong Insight Brand Marketing 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.