Returns On Capital At Gulf Resources (NASDAQ:GURE) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Gulf Resources (NASDAQ:GURE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Gulf Resources is:

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

0.09 = US$25m ÷ (US$291m - US$13m) (Based on the trailing twelve months to September 2022).

So, Gulf Resources has an ROCE of 9.0%. On its own, that's a low figure but it's around the 11% average generated by the Chemicals industry.

View our latest analysis for Gulf Resources

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Gulf Resources has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Gulf Resources' ROCE Trend?

Over the past five years, Gulf Resources' ROCE has remained relatively flat while the business is using 30% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 9.0%, it's hard to get excited about these developments.

What We Can Learn From Gulf Resources' ROCE

In summary, Gulf Resources isn't reinvesting funds back into the business and returns aren't growing. Since the stock has declined 63% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for Gulf Resources you'll probably want to know about.

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.

What are the risks and opportunities for Gulf Resources?

NasdaqGS:GURE

Gulf Resources

Gulf Resources, Inc., through its subsidiaries, manufactures and trades bromine and crude salt, chemical products, and natural gas in the People’s Republic of China.Show more

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Rewards

• Trading at 81.2% below our estimate of its fair value

• Earnings grew by 2401.4% over the past year

Risks

• Does not have a meaningful market cap ($28M)

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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.