If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in China Golden Classic Group's (HKG:8281) returns on capital, so let's have a look.
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)
0.037 = CN¥9.3m ÷ (CN¥353m - CN¥104m) (Based on the trailing twelve months to March 2022).
Therefore, China Golden Classic Group has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Golden Classic Group's ROCE against it's prior returns. If you'd like to look at how China Golden Classic Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is China Golden Classic Group's ROCE Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 3.7%. The amount of capital employed has increased too, by 22%. So we're very much inspired by what we're seeing at China Golden Classic Group thanks to its ability to profitably reinvest capital.
The Key Takeaway
In summary, it's great to see that China Golden Classic Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 57% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know about the risks facing China Golden Classic Group, we've discovered 3 warning signs that you should be aware of.
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.
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