Guoco Group's (HKG:53) Returns Have Hit A Wall

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Guoco Group (HKG:53) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Guoco Group, this is the formula:

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

0.035 = US$531m ÷ (US$17b - US$2.0b) (Based on the trailing twelve months to December 2024).

So, Guoco Group has an ROCE of 3.5%. In absolute terms, that's a low return but it's around the Industrials industry average of 3.2%.

See our latest analysis for Guoco Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guoco Group's ROCE against it's prior returns. If you're interested in investigating Guoco Group's past further, check out this free graph covering Guoco Group's past earnings, revenue and cash flow.

What Can We Tell From Guoco Group's ROCE Trend?

Over the past five years, Guoco Group's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Guoco Group doesn't end up being a multi-bagger in a few years time.

Our Take On Guoco Group's ROCE

In a nutshell, Guoco Group has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guoco Group has the makings of a multi-bagger.

Guoco Group does have some risks though, and we've spotted 2 warning signs for Guoco Group that you might be interested in.

While Guoco Group 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.