Grand Brilliance Group Holdings (HKG:8372) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Grand Brilliance Group Holdings (HKG:8372) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for Grand Brilliance Group Holdings:

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

0.10 = HK$9.3m ÷ (HK$107m - HK$14m) (Based on the trailing twelve months to December 2020).

Thus, Grand Brilliance Group Holdings has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.8%.

See our latest analysis for Grand Brilliance Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Grand Brilliance Group Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Grand Brilliance Group Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Grand Brilliance Group Holdings, we didn't gain much confidence. Around four years ago the returns on capital were 45%, but since then they've fallen to 10%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Grand Brilliance Group Holdings' ROCE

In summary, Grand Brilliance Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 52% in the last three years. Therefore based on the analysis done in this article, we don't think Grand Brilliance Group Holdings has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Grand Brilliance Group Holdings (of which 1 is concerning!) that you should know about.

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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