If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 GRG Banking Equipment (SZSE:002152), it didn’t seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 GRG Banking Equipment is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.068 = CN¥1.0b ÷ (CN¥25b – CN¥9.7b) (Based on the trailing twelve months to March 2024).
Thus, GRG Banking Equipment has an ROCE of 6.8%. In absolute terms, that’s a low return, but it’s much better than the Tech industry average of 5.4%.
Check out our latest analysis for GRG Banking Equipment
Above you can see how the current ROCE for GRG Banking Equipment 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 GRG Banking Equipment .
What Can We Tell From GRG Banking Equipment’s ROCE Trend?
The returns on capital haven’t changed much for GRG Banking Equipment in recent years. Over the past five years, ROCE has remained relatively flat at around 6.8% and the business has deployed 55% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.
On another note, while the change in ROCE trend might not scream for attention, it’s interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn’t increased to 39% of total assets, this reported ROCE would probably be less than6.8% because total capital employed would be higher.The 6.8% ROCE could be even lower if current liabilities weren’t 39% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
What We Can Learn From GRG Banking Equipment’s ROCE
In conclusion, GRG Banking Equipment has been investing more capital into the business, but returns on that capital haven’t increased. Although the market must be expecting these trends to improve because the stock has gained 42% over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
GRG Banking Equipment does have some risks though, and we’ve spotted 1 warning sign for GRG Banking Equipment that you might be interested in.
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.
New: Manage All Your Stock Portfolios in One Place
We’ve created the ultimate portfolio companion for stock investors, and it’s free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
