We Like These Underlying Return On Capital Trends At GHTLtd (SZSE:300711)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at GHTLtd (SZSE:300711) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

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 GHTLtd is:

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

0.073 = CN¥52m ÷ (CN¥986m - CN¥263m) (Based on the trailing twelve months to September 2024).

Therefore, GHTLtd has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 4.1% generated by the Communications industry, it's much better.

See our latest analysis for GHTLtd

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

So How Is GHTLtd's ROCE Trending?

We're delighted to see that GHTLtd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.3% on its capital. In addition to that, GHTLtd is employing 35% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 27% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On GHTLtd's ROCE

In summary, it's great to see that GHTLtd has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

GHTLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While GHTLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.