Capital Allocation Trends At Giant Network Group (SZSE:002558) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Giant Network Group (SZSE:002558) 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 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. To calculate this metric for Giant Network Group, this is the formula:

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

0.069 = CN¥844m ÷ (CN¥14b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

Therefore, Giant Network Group has an ROCE of 6.9%. On its own that's a low return, but compared to the average of 5.3% generated by the Entertainment industry, it's much better.

View our latest analysis for Giant Network Group

Above you can see how the current ROCE for Giant Network Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Giant Network Group for free.

What Does the ROCE Trend For Giant Network Group Tell Us?

On the surface, the trend of ROCE at Giant Network Group doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Giant Network Group's ROCE

Bringing it all together, while we're somewhat encouraged by Giant Network Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Giant Network Group does have some risks though, and we've spotted 1 warning sign for Giant Network Group that you might be interested in.

While Giant Network 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.