Investors Could Be Concerned With Golden Heaven Group Holdings' (NASDAQ:GDHG) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Golden Heaven Group Holdings (NASDAQ:GDHG), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Golden Heaven Group Holdings:

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

0.16 = US$11m ÷ (US$82m - US$15m) (Based on the trailing twelve months to September 2023).

Thus, Golden Heaven Group Holdings has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.5% it's much better.

See our latest analysis for Golden Heaven Group Holdings

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Golden Heaven Group Holdings, we didn't gain much confidence. Around three years ago the returns on capital were 44%, but since then they've fallen to 16%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Golden Heaven Group Holdings has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

We're a bit apprehensive about Golden Heaven Group Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Unsurprisingly then, the stock has dived 91% over the last year, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Golden Heaven Group Holdings does have some risks, we noticed 5 warning signs (and 3 which are concerning) we think you should know about.

While Golden Heaven Group Holdings 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. 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.