If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Guangdong Hongda Holdings Group's (SZSE:002683) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guangdong Hongda Holdings Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥1.0b ÷ (CN¥15b - CN¥5.5b) (Based on the trailing twelve months to September 2023).
Therefore, Guangdong Hongda Holdings Group has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Metals and Mining industry.
Check out our latest analysis for Guangdong Hongda Holdings Group
Above you can see how the current ROCE for Guangdong Hongda Holdings Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangdong Hongda Holdings Group here for free.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 144% in that time. 10% is a pretty standard return, and it provides some comfort knowing that Guangdong Hongda Holdings Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Guangdong Hongda Holdings Group's ROCE
The main thing to remember is that Guangdong Hongda Holdings Group has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 118% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing to note, we've identified 1 warning sign with Guangdong Hongda Holdings Group and understanding this should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.