If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Guangzhou Development Group (SHSE:600098), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Guangzhou Development Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = CN¥2.6b ÷ (CN¥68b - CN¥12b) (Based on the trailing twelve months to September 2023).
Therefore, Guangzhou Development Group has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.
See our latest analysis for Guangzhou Development Group
Above you can see how the current ROCE for Guangzhou Development Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
In terms of Guangzhou Development Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.7% from 6.2% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.
In Conclusion...
To conclude, we've found that Guangzhou Development Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 6.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing: We've identified 2 warning signs with Guangzhou Development Group (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.
While Guangzhou Development Group 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.