To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Central China Land MediaLTD (SZSE:000719) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
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. 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)
0.091 = CN¥1.1b ÷ (CN¥17b - CN¥5.8b) (Based on the trailing twelve months to March 2024).
Thus, Central China Land MediaLTD has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Media industry average of 4.0%.
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, you can check out the forecasts from the analysts covering Central China Land MediaLTD for free.
How Are Returns Trending?
The returns on capital haven't changed much for Central China Land MediaLTD in recent years. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 38% 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.
Our Take On Central China Land MediaLTD's ROCE
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 87% 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.
On a final note, we found 2 warning signs for Central China Land MediaLTD (1 is a bit unpleasant) you should be aware of.
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.
