Returns On Capital Signal Tricky Times Ahead For GRG Banking Equipment (SZSE:002152)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating GRG Banking Equipment (SZSE:002152), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on GRG Banking Equipment is:

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

0.054 = CN¥882m ÷ (CN¥28b - CN¥11b) (Based on the trailing twelve months to September 2024).

Therefore, GRG Banking Equipment has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.4%.

See 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?

On the surface, the trend of ROCE at GRG Banking Equipment doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.4% from 8.9% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, GRG Banking Equipment's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.4%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On GRG Banking Equipment's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for GRG Banking Equipment. And the stock has followed suit returning a meaningful 77% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for GRG Banking Equipment that we think you should be aware of.

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.