If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Guangdong Chant Group (SZSE:002616) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Guangdong Chant Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.073 = CN¥578m ÷ (CN¥11b - CN¥2.8b) (Based on the trailing twelve months to March 2024).

So, Guangdong Chant Group has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.9% generated by the Renewable Energy industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Chant Group's ROCE against it's prior returns. If you'd like to look at how Guangdong Chant Group has performed in the past in other metrics, you can view this free graph of Guangdong Chant Group's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Guangdong Chant Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.3% for the last five years, and the capital employed within the business has risen 136% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

In conclusion, Guangdong Chant Group has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. Therefore based on the analysis done in this article, we don't think Guangdong Chant Group has the makings of a multi-bagger.

Guangdong Chant Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.