If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Guangdong Huate Gas (SHSE:688268) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Guangdong Huate Gas, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = CN¥187m ÷ (CN¥3.2b - CN¥428m) (Based on the trailing twelve months to September 2023).
Therefore, Guangdong Huate Gas has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.
View our latest analysis for Guangdong Huate Gas
Above you can see how the current ROCE for Guangdong Huate Gas 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 Guangdong Huate Gas.
What The Trend Of ROCE Can Tell Us
In terms of Guangdong Huate Gas' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.8% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Guangdong Huate Gas has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Guangdong Huate Gas' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Guangdong Huate Gas have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we've found 1 warning sign for Guangdong Huate Gas that we think you should be aware of.
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.