Returns On Capital Signal Tricky Times Ahead For Grand Power Logistics Group (HKG:8489)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Grand Power Logistics Group (HKG:8489) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Grand Power Logistics Group is:

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

0.019 = HK$3.2m ÷ (HK$278m - HK$114m) (Based on the trailing twelve months to September 2022).

So, Grand Power Logistics Group has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 12%.

See our latest analysis for Grand Power Logistics Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Grand Power Logistics Group's ROCE against it's prior returns. If you're interested in investigating Grand Power Logistics Group's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Grand Power Logistics Group, we didn't gain much confidence. Around four years ago the returns on capital were 23%, but since then they've fallen to 1.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 related note, Grand Power Logistics Group has decreased its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Grand Power Logistics Group's ROCE

To conclude, we've found that Grand Power Logistics Group is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Grand Power Logistics Group has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Grand Power Logistics Group that we think 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.

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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.