If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Guangdong South New MediaLtd (SZSE:300770), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
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 South New MediaLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CN¥699m ÷ (CN¥4.7b - CN¥1.2b) (Based on the trailing twelve months to December 2023).
Therefore, Guangdong South New MediaLtd has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Media industry average of 4.8%.
SZSE:300770 Return on Capital Employed March 24th 2024
In the above chart we have measured Guangdong South New MediaLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guangdong South New MediaLtd .
What Can We Tell From Guangdong South New MediaLtd's ROCE Trend?
When we looked at the ROCE trend at Guangdong South New MediaLtd, we didn't gain much confidence. Historically returns on capital were even higher at 29%, but they have dropped over the last five years. However it looks like Guangdong South New MediaLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Guangdong South New MediaLtd's ROCE
In summary, Guangdong South New MediaLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last three years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing to note, we've identified 1 warning sign with Guangdong South New MediaLtd and understanding it should be part of your investment process.
Guangdong South New MediaLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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