The Returns At GDS Holdings (NASDAQ:GDS) Aren't Growing

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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.

What Is 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 GDS Holdings is:

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

0.0091 = CN¥629m ÷ (CN¥77b - CN¥7.4b) (Based on the trailing twelve months to September 2023).

Therefore, GDS Holdings has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

Check out our latest analysis for GDS Holdings

In the above chart we have measured GDS Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering GDS Holdings here for free.

What Can We Tell From GDS Holdings' ROCE Trend?

There are better returns on capital out there than what we're seeing at GDS Holdings. Over the past five years, ROCE has remained relatively flat at around 0.9% and the business has deployed 307% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From GDS Holdings' ROCE

In summary, GDS Holdings has simply been reinvesting capital and generating the same low rate of return as before. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 80% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

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

While GDS 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.