Here's What To Make Of GRG Banking Equipment's (SZSE:002152) Decelerating Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at GRG Banking Equipment (SZSE:002152) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 GRG Banking Equipment, this is the formula:

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

0.078 = CN¥1.3b ÷ (CN¥28b - CN¥11b) (Based on the trailing twelve months to December 2024).

So, GRG Banking Equipment has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 6.1% generated by the Tech industry, it's much better.

Check out our latest analysis for GRG Banking Equipment

In the above chart we have measured GRG Banking Equipment's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for GRG Banking Equipment .

What Can We Tell From GRG Banking Equipment's ROCE Trend?

There are better returns on capital out there than what we're seeing at GRG Banking Equipment. Over the past five years, ROCE has remained relatively flat at around 7.8% and the business has deployed 64% more capital into its operations. 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.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 41% of total assets, this reported ROCE would probably be less than7.8% because total capital employed would be higher.The 7.8% ROCE could be even lower if current liabilities weren't 41% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

Our Take On GRG Banking Equipment's ROCE

In conclusion, GRG Banking Equipment has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 86% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

GRG Banking Equipment does have some risks though, and we've spotted 1 warning sign for GRG Banking Equipment 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.