Return Trends At GD Power DevelopmentLtd (SHSE:600795) Aren't Appealing

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think GD Power DevelopmentLtd (SHSE:600795) 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for GD Power DevelopmentLtd, this is the formula:

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

0.063 = CN¥21b ÷ (CN¥469b - CN¥136b) (Based on the trailing twelve months to June 2024).

So, GD Power DevelopmentLtd has an ROCE of 6.3%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

See our latest analysis for GD Power DevelopmentLtd

Above you can see how the current ROCE for GD Power DevelopmentLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for GD Power DevelopmentLtd .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at GD Power DevelopmentLtd. Over the past five years, ROCE has remained relatively flat at around 6.3% and the business has deployed 22% 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.

Our Take On GD Power DevelopmentLtd's ROCE

In summary, GD Power DevelopmentLtd has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 143% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

GD Power DevelopmentLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While GD Power DevelopmentLtd 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.