Grand Brilliance Group Holdings (HKG:8372) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Grand Brilliance Group Holdings (HKG:8372), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Grand Brilliance Group Holdings, this is the formula:

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

0.064 = HK$6.1m ÷ (HK$110m - HK$15m) (Based on the trailing twelve months to June 2022).

Therefore, Grand Brilliance Group Holdings has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

Our analysis indicates that 8372 is potentially overvalued!

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.

So How Is Grand Brilliance Group Holdings' ROCE Trending?

In terms of Grand Brilliance Group Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.4% from 50% five years ago. However it looks like Grand Brilliance Group Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Grand Brilliance Group Holdings' ROCE

To conclude, we've found that Grand Brilliance Group Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last three years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 2 warning signs with Grand Brilliance Group Holdings (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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.