Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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 Insight Brand Marketing GroupLtd (SZSE:300781) 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 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. To calculate this metric for Guangdong Insight Brand Marketing GroupLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = CN¥58m ÷ (CN¥1.1b - CN¥248m) (Based on the trailing twelve months to March 2024).
Therefore, Guangdong Insight Brand Marketing GroupLtd has an ROCE of 7.1%. In absolute terms, that's a low return, but it's much better than the Media industry average of 4.0%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Guangdong Insight Brand Marketing GroupLtd's past further, check out this free graph covering Guangdong Insight Brand Marketing GroupLtd's past earnings, revenue and cash flow.
So How Is Guangdong Insight Brand Marketing GroupLtd's ROCE Trending?
Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 158%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Guangdong Insight Brand Marketing GroupLtd might not have received a full period of earnings contribution from it.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Guangdong Insight Brand Marketing GroupLtd is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 60% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
One more thing to note, we've identified 2 warning signs with Guangdong Insight Brand Marketing GroupLtd and understanding these should be part of your investment process.
While Guangdong Insight Brand Marketing GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.