Here's What To Make Of Gold Peak Industries (Holdings)'s (HKG:40) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Gold Peak Industries (Holdings) (HKG:40), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Gold Peak Industries (Holdings):

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

0.036 = HK$145m ÷ (HK$8.8b - HK$4.8b) (Based on the trailing twelve months to September 2021).

So, Gold Peak Industries (Holdings) has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.9%.

Check out our latest analysis for Gold Peak Industries (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gold Peak Industries (Holdings)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gold Peak Industries (Holdings), check out these free graphs here.

What Can We Tell From Gold Peak Industries (Holdings)'s ROCE Trend?

The returns on capital haven't changed much for Gold Peak Industries (Holdings) in recent years. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 3.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Gold Peak Industries (Holdings)'s current liabilities are still rather high at 54% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Gold Peak Industries (Holdings)'s ROCE

In conclusion, Gold Peak Industries (Holdings) has been investing more capital into the business, but returns on that capital haven't increased. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Gold Peak Industries (Holdings) we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.