There's Been No Shortage Of Growth Recently For Guangdong Advertising GroupLtd's (SZSE:002400) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Guangdong Advertising GroupLtd (SZSE:002400) so let's look a bit deeper.

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

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. The formula for this calculation on Guangdong Advertising GroupLtd is:

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

0.082 = CN¥431m ÷ (CN¥8.7b - CN¥3.4b) (Based on the trailing twelve months to September 2023).

Thus, Guangdong Advertising GroupLtd has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 4.9% generated by the Media industry, it's much better.

View our latest analysis for Guangdong Advertising GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Advertising GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangdong Advertising GroupLtd.

What The Trend Of ROCE Can Tell Us

Guangdong Advertising GroupLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 8.2%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From Guangdong Advertising GroupLtd's ROCE

To sum it up, Guangdong Advertising GroupLtd is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 66% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Guangdong Advertising GroupLtd can keep these trends up, it could have a bright future ahead.

Guangdong Advertising GroupLtd does have some risks though, and we've spotted 2 warning signs for Guangdong Advertising GroupLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.