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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Huaibei GreenGold Industry Investment (HKG:2450) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 Huaibei GreenGold Industry Investment is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥86m ÷ (CN¥2.6b - CN¥467m) (Based on the trailing twelve months to June 2024).
Thus, Huaibei GreenGold Industry Investment has an ROCE of 4.1%. In absolute terms, that's a low return, but it's much better than the Basic Materials industry average of 2.4%.
See our latest analysis for Huaibei GreenGold Industry Investment
Historical performance is a great place to start when researching a stock so above you can see the gauge for Huaibei GreenGold Industry Investment's ROCE against it's prior returns. If you're interested in investigating Huaibei GreenGold Industry Investment's past further, check out this free graph covering Huaibei GreenGold Industry Investment's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Huaibei GreenGold Industry Investment doesn't inspire confidence. Around four years ago the returns on capital were 41%, but since then they've fallen to 4.1%. 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.
Our Take On Huaibei GreenGold Industry Investment's ROCE
We're a bit apprehensive about Huaibei GreenGold Industry Investment because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 167%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you'd like to know more about Huaibei GreenGold Industry Investment, we've spotted 4 warning signs, and 2 of them are a bit unpleasant.
While Huaibei GreenGold Industry Investment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.