Gudou Holdings (HKG:8308) Has Some Way To Go To Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Gudou Holdings (HKG:8308) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Gudou Holdings:

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

0.05 = CN¥42m ÷ (CN¥1.2b - CN¥339m) (Based on the trailing twelve months to September 2020).

Thus, Gudou Holdings has an ROCE of 5.0%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.2%.

Check out our latest analysis for Gudou Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Gudou Holdings, check out these free graphs here.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Gudou Holdings. The company has consistently earned 5.0% for the last five years, and the capital employed within the business has risen 28% in that time. 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 Gudou Holdings' ROCE

Long story short, while Gudou Holdings has been reinvesting its capital, the returns that it's generating haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 72% in the last three years. Therefore based on the analysis done in this article, we don't think Gudou Holdings has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Gudou Holdings (1 doesn't sit too well with us) 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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