Will China Golden Classic Group (HKG:8281) Multiply In Value Going Forward?

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at China Golden Classic Group (HKG:8281) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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 China Golden Classic Group, this is the formula:

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

0.039 = CN¥8.7m ÷ (CN¥363m - CN¥138m) (Based on the trailing twelve months to September 2020).

So, China Golden Classic Group has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 10%.

View our latest analysis for China Golden Classic Group

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 want to delve into the historical earnings, revenue and cash flow of China Golden Classic Group, check out these free graphs here.

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 3.9% from 31% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, China Golden Classic Group has done well to pay down its current liabilities to 38% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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 in the last three years, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 final note, you should learn about the 3 warning signs we've spotted with China Golden Classic Group (including 1 which is a bit unpleasant) .

While China Golden Classic Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.
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