Slowing Rates Of Return At Hunan Gold (SZSE:002155) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 briefly looking over the numbers, we don't think Hunan Gold (SZSE:002155) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hunan Gold, this is the formula:

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

0.093 = CN¥605m ÷ (CN¥7.6b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

Therefore, Hunan Gold has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 6.7% generated by the Metals and Mining industry, it's much better.

See our latest analysis for Hunan Gold

In the above chart we have measured Hunan Gold's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hunan Gold for free.

How Are Returns Trending?

The returns on capital haven't changed much for Hunan Gold in recent years. The company has consistently earned 9.3% for the last five years, and the capital employed within the business has risen 27% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Hunan Gold has done well to reduce current liabilities to 14% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Hunan Gold's ROCE

In summary, Hunan Gold has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 126% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Hunan Gold does come with some risks, and we've found 1 warning sign that you should be aware of.

While Hunan Gold 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.