Gree Electric Appliances of Zhuhai (SZSE:000651) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Gree Electric Appliances of Zhuhai (SZSE:000651), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Gree Electric Appliances of Zhuhai:

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 9.7% 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, you can check out the forecasts from the analysts covering Gree Electric Appliances of Zhuhai for free.

What Does the ROCE Trend For Gree Electric Appliances of Zhuhai Tell Us?

When we looked at the ROCE trend at Gree Electric Appliances of Zhuhai, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. However it looks like Gree Electric Appliances of Zhuhai 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.

On a side note, Gree Electric Appliances of Zhuhai's current liabilities are still rather high at 57% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line 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. And investors may be recognizing these trends since the stock has only returned a total of 13% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, Gree Electric Appliances of Zhuhai does come with some risks, and we've found 1 warning sign that 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.