China Golden Classic Group (HKG:8281) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at China Golden Classic Group (HKG:8281), 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. The formula for this calculation on China Golden Classic Group is:

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

0.035 = CN¥8.9m ÷ (CN¥330m - CN¥73m) (Based on the trailing twelve months to June 2023).

Thus, China Golden Classic Group has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 10%.

Check out our latest analysis for China Golden Classic Group

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're interested in investigating China Golden Classic Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China Golden Classic Group Tell Us?

When we looked at the ROCE trend at China Golden Classic Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.5% from 7.2% five years ago. However it looks like China Golden Classic Group 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.

What We Can Learn From China Golden Classic Group's ROCE

Bringing it all together, while we're somewhat encouraged by China Golden Classic Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. 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've found 1 warning sign for China Golden Classic Group that we think you should be aware of.

While China Golden Classic Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.