There Are Reasons To Feel Uneasy About G & M Holdings' (HKG:6038) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at G & M Holdings (HKG:6038) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 G & M Holdings, this is the formula:

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

0.17 = HK$51m ÷ (HK$457m - HK$157m) (Based on the trailing twelve months to June 2023).

Thus, G & M Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Construction industry.

Check out our latest analysis for G & M Holdings

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

What Can We Tell From G & M Holdings' ROCE Trend?

On the surface, the trend of ROCE at G & M Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 30% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From G & M Holdings' ROCE

To conclude, we've found that G & M Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching G & M Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.