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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Guangdong Investment (HKG:270), 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 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. Analysts use this formula to calculate it for Guangdong Investment:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = HK$6.0b ÷ (HK$143b - HK$43b) (Based on the trailing twelve months to September 2023).
So, Guangdong Investment has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.
See our latest analysis for Guangdong Investment
Above you can see how the current ROCE for Guangdong Investment compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Guangdong Investment Tell Us?
On the surface, the trend of ROCE at Guangdong Investment doesn't inspire confidence. Around five years ago the returns on capital were 9.7%, but since then they've fallen to 6.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, Guangdong Investment's current liabilities have increased over the last five years to 30% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.0%. 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.
What We Can Learn From Guangdong Investment's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Guangdong Investment have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know more about Guangdong Investment, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.