Gulf Resources (NASDAQ:GURE) Is Looking To Continue Growing Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Gulf Resources (NASDAQ:GURE) so let's look a bit deeper.

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. To calculate this metric for Gulf Resources, this is the formula:

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

0.055 = US$16m ÷ (US$296m - US$11m) (Based on the trailing twelve months to March 2023).

Thus, Gulf Resources has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

View our latest analysis for Gulf Resources

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

The Trend Of ROCE

Gulf Resources has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 141% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Gulf Resources appears to been achieving more with less, since the business is using 28% less capital to run its operation. Gulf Resources may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On Gulf Resources' ROCE

In a nutshell, we're pleased to see that Gulf Resources has been able to generate higher returns from less capital. Given the stock has declined 65% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 1 warning sign with Gulf Resources and understanding this should be part of your investment process.

While Gulf Resources 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.