Guangdong Ganhua Science & Industry (SZSE:000576) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Guangdong Ganhua Science & Industry's (SZSE:000576) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Guangdong Ganhua Science & Industry, this is the formula:

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

0.035 = CN¥68m ÷ (CN¥2.0b - CN¥108m) (Based on the trailing twelve months to September 2023).

So, Guangdong Ganhua Science & Industry has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 8.7%.

Check out our latest analysis for Guangdong Ganhua Science & Industry

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Guangdong Ganhua Science & Industry has performed in the past in other metrics, you can view this free graph of Guangdong Ganhua Science & Industry's past earnings, revenue and cash flow.

What Can We Tell From Guangdong Ganhua Science & Industry's ROCE Trend?

The fact that Guangdong Ganhua Science & Industry is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 3.5% which is a sight for sore eyes. In addition to that, Guangdong Ganhua Science & Industry is employing 90% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Guangdong Ganhua Science & Industry's ROCE

To the delight of most shareholders, Guangdong Ganhua Science & Industry has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 25% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

While Guangdong Ganhua Science & Industry looks impressive, no company is worth an infinite price. The intrinsic value infographic for 000576 helps visualize whether it is currently trading for a fair price.

While Guangdong Ganhua Science & Industry 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.