We're Watching These Trends At Grand Brilliance Group Holdings (HKG:8372)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).

So, Grand Brilliance Group Holdings has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns 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 Can We Tell From Grand Brilliance Group Holdings' ROCE Trend?

In terms of Grand Brilliance Group Holdings' historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 10% from 45% four 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Grand Brilliance Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 25% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 3 warning signs for Grand Brilliance Group Holdings (1 is a bit concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

If you decide to trade Grand Brilliance Group Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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