If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Huaibei GreenGold Industry Investment (HKG:2450), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Huaibei GreenGold Industry Investment:
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 3.2%.
Check out our latest analysis for Huaibei GreenGold Industry Investment
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'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.
How Are Returns Trending?
In terms of Huaibei GreenGold Industry Investment's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 41% over the last four years. 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.
What We Can Learn From Huaibei GreenGold Industry Investment's ROCE
In summary, we're somewhat concerned by Huaibei GreenGold Industry Investment's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 495% over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Huaibei GreenGold Industry Investment does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those make us uncomfortable...
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.