Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating GUOMAI Culture & Media (SZSE:301052), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for GUOMAI Culture & Media:

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

0.059 = CN¥43m ÷ (CN¥886m - CN¥158m) (Based on the trailing twelve months to September 2024).

Therefore, GUOMAI Culture & Media has an ROCE of 5.9%. In absolute terms, that's a low return but it's around the Media industry average of 5.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for GUOMAI Culture & Media's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GUOMAI Culture & Media.

So How Is GUOMAI Culture & Media's ROCE Trending?

On the surface, the trend of ROCE at GUOMAI Culture & Media doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.9% from 14% five years ago. However it looks like GUOMAI Culture & Media 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that GUOMAI Culture & Media is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 16% over the last three years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about GUOMAI Culture & Media, we've spotted 3 warning signs, and 2 of them are significant.

While GUOMAI Culture & Media 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.