Returns On Capital At Grand Brilliance Group Holdings (HKG:8372) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Grand Brilliance Group Holdings (HKG:8372) 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. 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)

0.07 = HK$6.7m ÷ (HK$106m - HK$11m) (Based on the trailing twelve months to December 2021).

Therefore, Grand Brilliance Group Holdings has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 14%.

Check out 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 Can We Tell From Grand Brilliance Group Holdings' ROCE Trend?

When we looked at the ROCE trend at Grand Brilliance Group Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 45%, but since then they've fallen to 7.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Grand Brilliance Group Holdings has decreased its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Grand Brilliance Group Holdings' ROCE

While returns have fallen for Grand Brilliance Group Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 37% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 5 warning signs we've spotted with Grand Brilliance Group Holdings (including 1 which shouldn't be ignored) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.