Capital Allocation Trends At Gree Electric Appliances of Zhuhai (SZSE:000651) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Gree Electric Appliances of Zhuhai (SZSE:000651), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Gree Electric Appliances of Zhuhai, this is the formula:

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

0.19 = CN¥29b ÷ (CN¥371b - CN¥212b) (Based on the trailing twelve months to September 2024).

Thus, Gree Electric Appliances of Zhuhai has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Consumer Durables industry.

See our latest analysis for Gree Electric Appliances of Zhuhai

Above you can see how the current ROCE for Gree Electric Appliances of Zhuhai 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 Gree Electric Appliances of Zhuhai .

What Can We Tell From Gree Electric Appliances of Zhuhai's ROCE Trend?

On the surface, the trend of ROCE at Gree Electric Appliances of Zhuhai doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 19%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Gree Electric Appliances of Zhuhai has a current liabilities to total assets ratio of 57%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Gree Electric Appliances of Zhuhai's ROCE

In summary, Gree Electric Appliances of Zhuhai is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Gree Electric Appliances of Zhuhai that we think you should be aware of.

While Gree Electric Appliances of Zhuhai isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.