Returns On Capital At Guangdong Sanhe Pile (SZSE:003037) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Guangdong Sanhe Pile (SZSE:003037) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Guangdong Sanhe Pile is:

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

0.051 = CN¥184m ÷ (CN¥6.8b - CN¥3.2b) (Based on the trailing twelve months to September 2023).

So, Guangdong Sanhe Pile has an ROCE of 5.1%. On its own, that's a low figure but it's around the 6.1% average generated by the Basic Materials industry.

View our latest analysis for Guangdong Sanhe Pile

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Sanhe Pile's ROCE against it's prior returns. If you'd like to look at how Guangdong Sanhe Pile has performed in the past in other metrics, you can view this free graph of Guangdong Sanhe Pile's past earnings, revenue and cash flow.

So How Is Guangdong Sanhe Pile's ROCE Trending?

We weren't thrilled with the trend because Guangdong Sanhe Pile's ROCE has reduced by 82% over the last five years, while the business employed 264% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Guangdong Sanhe Pile's earnings and if they change as a result from the capital raise.

On a side note, Guangdong Sanhe Pile has done well to pay down its current liabilities to 47% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Guangdong Sanhe Pile's ROCE

To conclude, we've found that Guangdong Sanhe Pile is reinvesting in the business, but returns have been falling. Since the stock has declined 53% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong Sanhe Pile has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Guangdong Sanhe Pile (1 is significant) you should be aware of.

While Guangdong Sanhe Pile 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.