If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Guang Dong Qun Xing Toys co.Ltd (SZSE:002575) so let's look a bit deeper.
Understanding 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. Analysts use this formula to calculate it for Guang Dong Qun Xing Toys co.Ltd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0028 = CN¥2.2m ÷ (CN¥823m - CN¥22m) (Based on the trailing twelve months to March 2023).
So, Guang Dong Qun Xing Toys co.Ltd has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Leisure industry average of 7.9%.
See our latest analysis for Guang Dong Qun Xing Toys co.Ltd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guang Dong Qun Xing Toys co.Ltd's ROCE against it's prior returns. If you'd like to look at how Guang Dong Qun Xing Toys co.Ltd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Guang Dong Qun Xing Toys co.Ltd's ROCE Trending?
We're delighted to see that Guang Dong Qun Xing Toys co.Ltd is reaping rewards from its investments and has now broken into profitability. The company now earns 0.3% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
In Conclusion...
As discussed above, Guang Dong Qun Xing Toys co.Ltd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 36% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Guang Dong Qun Xing Toys co.Ltd does have some risks though, and we've spotted 2 warning signs for Guang Dong Qun Xing Toys co.Ltd that you might be interested in.
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.
