Guangdong New Grand Long Packing (SZSE:002836) Has Some Way To Go To Become A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Guangdong New Grand Long Packing (SZSE:002836), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Guangdong New Grand Long Packing, this is the formula:

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

0.15 = CN¥50m ÷ (CN¥492m - CN¥152m) (Based on the trailing twelve months to June 2024).

Thus, Guangdong New Grand Long Packing has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 5.3% it's much better.

View our latest analysis for Guangdong New Grand Long Packing

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're interested in investigating Guangdong New Grand Long Packing's past further, check out this free graph covering Guangdong New Grand Long Packing's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're a bit concerned with the trends, because the business is applying 37% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. So if this trend continues, don't be surprised if the business is smaller in a few years time.

Our Take On Guangdong New Grand Long Packing's ROCE

Overall, we're not ecstatic to see Guangdong New Grand Long Packing reducing the amount of capital it employs in the business. Unsurprisingly, the stock has only gained 8.4% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 2 warning signs for Guangdong New Grand Long Packing that we think you should be aware of.

While Guangdong New Grand Long Packing 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.