What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Goldcard Smart Group (SZSE:300349) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Goldcard Smart Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.085 = CN¥415m ÷ (CN¥6.9b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Goldcard Smart Group has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

Above you can see how the current ROCE for Goldcard Smart 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 Goldcard Smart Group for free.

So How Is Goldcard Smart Group's ROCE Trending?

When we looked at the ROCE trend at Goldcard Smart Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.5% from 12% five years ago. However it looks like Goldcard Smart Group 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 Key Takeaway

To conclude, we've found that Goldcard Smart Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 9.4% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Goldcard Smart Group, we've discovered 2 warning signs that you should be aware of.

While Goldcard Smart Group 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.