If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Central China Land MediaLTD (SZSE:000719), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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 Central China Land MediaLTD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = CN¥957m ÷ (CN¥16b - CN¥5.5b) (Based on the trailing twelve months to September 2023).
So, Central China Land MediaLTD has an ROCE of 8.9%. On its own that's a low return, but compared to the average of 4.9% generated by the Media industry, it's much better.
Check out our latest analysis for Central China Land MediaLTD
In the above chart we have measured Central China Land MediaLTD'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 Central China Land MediaLTD.
So How Is Central China Land MediaLTD's ROCE Trending?
There are better returns on capital out there than what we're seeing at Central China Land MediaLTD. The company has consistently earned 8.9% for the last five years, and the capital employed within the business has risen 32% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In conclusion, Central China Land MediaLTD has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 47% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Central China Land MediaLTD does have some risks though, and we've spotted 1 warning sign for Central China Land MediaLTD that you might be interested in.
While Central China Land MediaLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
