If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, GD Power DevelopmentLtd (SHSE:600795) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for GD Power DevelopmentLtd, this is the formula:

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

0.064 = CN¥21b ÷ (CN¥469b - CN¥132b) (Based on the trailing twelve months to March 2024).

Therefore, GD Power DevelopmentLtd has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.

Above you can see how the current ROCE for GD Power DevelopmentLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for GD Power DevelopmentLtd .

What Does the ROCE Trend For GD Power DevelopmentLtd Tell Us?

GD Power DevelopmentLtd's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 32% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On GD Power DevelopmentLtd's ROCE

In summary, we're delighted to see that GD Power DevelopmentLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 158% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

GD Power DevelopmentLtd does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While GD Power DevelopmentLtd 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.

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