What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Gansu Yasheng Industrial (Group) (SHSE:600108), it didn't seem to tick all of these boxes.
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 Gansu Yasheng Industrial (Group):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥171m ÷ (CN¥8.9b - CN¥3.1b) (Based on the trailing twelve months to September 2023).
So, Gansu Yasheng Industrial (Group) has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Gansu Yasheng Industrial (Group)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gansu Yasheng Industrial (Group), check out these free graphs here.
The Trend Of ROCE
There hasn't been much to report for Gansu Yasheng Industrial (Group)'s returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Gansu Yasheng Industrial (Group) to be a multi-bagger going forward.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 35% of total assets, this reported ROCE would probably be less than3.0% because total capital employed would be higher.The 3.0% ROCE could be even lower if current liabilities weren't 35% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
Our Take On Gansu Yasheng Industrial (Group)'s ROCE
In a nutshell, Gansu Yasheng Industrial (Group) has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 17% in the last five years. Therefore based on the analysis done in this article, we don't think Gansu Yasheng Industrial (Group) has the makings of a multi-bagger.
Gansu Yasheng Industrial (Group) does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...
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.