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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Guang Dong Qun Xing Toys co.Ltd (SZSE:002575) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Guang Dong Qun Xing Toys co.Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0071 = CN¥5.8m ÷ (CN¥841m - CN¥29m) (Based on the trailing twelve months to September 2023).
Thus, Guang Dong Qun Xing Toys co.Ltd has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Leisure industry average of 6.2%.
View our latest analysis for Guang Dong Qun Xing Toys co.Ltd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guang Dong Qun Xing Toys co.Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Guang Dong Qun Xing Toys co.Ltd, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Guang Dong Qun Xing Toys co.Ltd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.7%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
What We Can Learn From Guang Dong Qun Xing Toys co.Ltd's ROCE
To bring it all together, Guang Dong Qun Xing Toys co.Ltd has done well to increase the returns it's generating from its capital employed. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 2 warning signs facing Guang Dong Qun Xing Toys co.Ltd that you might find interesting.
While Guang Dong Qun Xing Toys co.Ltd 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.