What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Guo Tai Epoint SoftwareLtd (SHSE:688232), it didn't seem to tick all of these boxes.
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 Guo Tai Epoint SoftwareLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = CN¥182m ÷ (CN¥6.5b - CN¥1.0b) (Based on the trailing twelve months to September 2023).
Thus, Guo Tai Epoint SoftwareLtd has an ROCE of 3.4%. Even though it's in line with the industry average of 2.6%, it's still a low return by itself.
View our latest analysis for Guo Tai Epoint SoftwareLtd
Above you can see how the current ROCE for Guo Tai Epoint SoftwareLtd 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.
What Can We Tell From Guo Tai Epoint SoftwareLtd's ROCE Trend?
When we looked at the ROCE trend at Guo Tai Epoint SoftwareLtd, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 3.4% from 11% two years ago. However it looks like Guo Tai Epoint SoftwareLtd 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.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Guo Tai Epoint SoftwareLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a final note, we found 3 warning signs for Guo Tai Epoint SoftwareLtd (1 is a bit unpleasant) you should be aware of.
While Guo Tai Epoint SoftwareLtd 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.