There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Guangdong Brandmax MarketingLtd (SZSE:300805) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Guangdong Brandmax MarketingLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0081 = CN¥13m ÷ (CN¥2.0b - CN¥397m) (Based on the trailing twelve months to March 2024).
So, Guangdong Brandmax MarketingLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Media industry average of 4.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Brandmax MarketingLtd's ROCE against it's prior returns. If you'd like to look at how Guangdong Brandmax MarketingLtd has performed in the past in other metrics, you can view this free graph of Guangdong Brandmax MarketingLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Guangdong Brandmax MarketingLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Guangdong Brandmax MarketingLtd 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.
On a side note, Guangdong Brandmax MarketingLtd has done well to pay down its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Guangdong Brandmax MarketingLtd's ROCE
To conclude, we've found that Guangdong Brandmax MarketingLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 57% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Guangdong Brandmax MarketingLtd does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.
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.
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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.