Returns On Capital At Gree Electric Appliances of Zhuhai (SZSE:000651) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Gree Electric Appliances of Zhuhai (SZSE:000651), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Gree Electric Appliances of Zhuhai is:

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

0.16 = CN¥28b ÷ (CN¥381b - CN¥209b) (Based on the trailing twelve months to March 2024).

Therefore, Gree Electric Appliances of Zhuhai has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Consumer Durables industry.

View our latest analysis for Gree Electric Appliances of Zhuhai

In the above chart we have measured Gree Electric Appliances of Zhuhai's prior ROCE against its prior performance, but the future is arguably more important. 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 .

So How Is Gree Electric Appliances of Zhuhai's ROCE Trending?

In terms of Gree Electric Appliances of Zhuhai's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 29%, but since then they've fallen to 16%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 separate but related note, it's important to know that Gree Electric Appliances of Zhuhai has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Gree Electric Appliances of Zhuhai's ROCE

Bringing it all together, while we're somewhat encouraged by Gree Electric Appliances of Zhuhai's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Gree Electric Appliances of Zhuhai has the makings of a multi-bagger.

If you want to continue researching Gree Electric Appliances of Zhuhai, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.