Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Guangzhou Jiacheng International LogisticsLtd (SHSE:603535) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. Analysts use this formula to calculate it for Guangzhou Jiacheng International LogisticsLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = CN¥245m ÷ (CN¥4.4b - CN¥1.0b) (Based on the trailing twelve months to December 2023).
Therefore, Guangzhou Jiacheng International LogisticsLtd has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.3%.
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangzhou Jiacheng International LogisticsLtd.
What Can We Tell From Guangzhou Jiacheng International LogisticsLtd's ROCE Trend?
In terms of Guangzhou Jiacheng International LogisticsLtd's historical ROCE trend, it doesn't exactly demand attention. The company has employed 121% more capital in the last five years, and the returns on that capital have remained stable at 7.3%. 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.
The Bottom Line On Guangzhou Jiacheng International LogisticsLtd's ROCE
In summary, Guangzhou Jiacheng International LogisticsLtd has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 17% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know about the risks facing Guangzhou Jiacheng International LogisticsLtd, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.