If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 investigating GuiZhouYongJi PrintingLtd (SHSE:603058), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 GuiZhouYongJi PrintingLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = CN¥131m ÷ (CN¥1.6b - CN¥242m) (Based on the trailing twelve months to September 2023).
So, GuiZhouYongJi PrintingLtd has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Packaging industry average of 4.5%.
View our latest analysis for GuiZhouYongJi PrintingLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for GuiZhouYongJi PrintingLtd's ROCE against it's prior returns. If you're interested in investigating GuiZhouYongJi PrintingLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For GuiZhouYongJi PrintingLtd Tell Us?
When we looked at the ROCE trend at GuiZhouYongJi PrintingLtd, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 9.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On GuiZhouYongJi PrintingLtd's ROCE
While returns have fallen for GuiZhouYongJi PrintingLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 3.8% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing to note, we've identified 2 warning signs with GuiZhouYongJi PrintingLtd and understanding them should be part of your investment process.
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.