What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Guangdong Hotata Technology GroupLtd (SHSE:603848) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Guangdong Hotata Technology GroupLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥290m ÷ (CN¥3.0b - CN¥499m) (Based on the trailing twelve months to June 2023).
So, Guangdong Hotata Technology GroupLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Consumer Durables industry.
View our latest analysis for Guangdong Hotata Technology GroupLtd
In the above chart we have measured Guangdong Hotata Technology GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Guangdong Hotata Technology GroupLtd.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Guangdong Hotata Technology GroupLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 21% five years ago. However it looks like Guangdong Hotata Technology GroupLtd 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.
Our Take On Guangdong Hotata Technology GroupLtd's ROCE
In summary, Guangdong Hotata Technology GroupLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a final note, we've found 1 warning sign for Guangdong Hotata Technology GroupLtd that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.