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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Gree Electric Appliances of Zhuhai (SZSE:000651) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Gree Electric Appliances of Zhuhai is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥24b ÷ (CN¥399b - CN¥237b) (Based on the trailing twelve months to June 2023).
Therefore, Gree Electric Appliances of Zhuhai has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 6.6% it's much better.
View our latest analysis for Gree Electric Appliances of Zhuhai
In the above chart we have measured Gree Electric Appliances of Zhuhai's 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 Gree Electric Appliances of Zhuhai here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at Gree Electric Appliances of Zhuhai doesn't inspire confidence. To be more specific, ROCE has fallen from 35% over the last five years. However it looks like Gree Electric Appliances of Zhuhai 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 may take some time before the company starts to see any change in earnings from these investments.
On a separate but related note, it's important to know that Gree Electric Appliances of Zhuhai has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Gree Electric Appliances of Zhuhai's ROCE
Bringing it all together, while we're somewhat encouraged by Gree Electric Appliances of Zhuhai's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing, we've spotted 1 warning sign facing Gree Electric Appliances of Zhuhai that you might find interesting.
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.
