If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at GDS Holdings (NASDAQ:GDS), it didn't seem to tick all of these boxes.
What Is 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. The formula for this calculation on GDS Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0084 = CN¥555m ÷ (CN¥74b - CN¥8.3b) (Based on the trailing twelve months to December 2023).
Thus, GDS Holdings has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.
In the above chart we have measured GDS Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering GDS Holdings for free.
The Trend Of ROCE
The returns on capital haven't changed much for GDS Holdings in recent years. The company has consistently earned 0.8% for the last five years, and the capital employed within the business has risen 281% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On GDS Holdings' ROCE
In conclusion, GDS Holdings has been investing more capital into the business, but returns on that capital haven't increased. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 81% over the last five years. Therefore based on the analysis done in this article, we don't think GDS Holdings has the makings of a multi-bagger.
Like most companies, GDS Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.
While GDS Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.