Some Investors May Be Worried About GDS Holdings' (NASDAQ:GDS) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating GDS Holdings (NASDAQ:GDS), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on GDS Holdings is:

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

0.013 = CN¥930m ÷ (CN¥82b - CN¥12b) (Based on the trailing twelve months to September 2024).

Thus, GDS Holdings has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

View our latest analysis for GDS Holdings

Above you can see how the current ROCE for GDS Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for GDS Holdings .

What The Trend Of ROCE Can Tell Us

In terms of GDS Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.7%, but since then they've fallen to 1.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for GDS Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 59% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 2 warning signs for GDS Holdings you'll probably want to know about.

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.