Returns At Guangzhou Development Group (SHSE:600098) Are On The Way Up

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Guangzhou Development Group's (SHSE:600098) 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. Analysts use this formula to calculate it for Guangzhou Development Group:

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

0.056 = CN¥3.4b ÷ (CN¥78b - CN¥18b) (Based on the trailing twelve months to September 2024).

Thus, Guangzhou Development Group has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 10.0%.

View our latest analysis for Guangzhou Development Group

Above you can see how the current ROCE for Guangzhou Development Group 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 Guangzhou Development Group .

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.6%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 77%. So we're very much inspired by what we're seeing at Guangzhou Development Group thanks to its ability to profitably reinvest capital.

The Bottom Line On Guangzhou Development Group's ROCE

In summary, it's great to see that Guangzhou Development Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 19% to shareholders. So with that in mind, we think the stock deserves further research.

Guangzhou Development Group does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Guangzhou Development Group 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.