Guoco Group (HKG:53) needs to do more to multiply its value in the future

When we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Usually we want to identify a trend of growth to return on the capital employed (ROCE) and in parallel a growing base of the capital employed. This shows us that it is a compound interest machine that is able to continuously reinvest its profits into the company and generate higher returns. However, after a quick look at the numbers, we do not believe Guoco Group (HKG:53) has the potential to be a multi-bagger in the future, but let’s take a look at why that might be the case.

Understanding Return on Capital Employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a company can generate with the capital employed in its business. To calculate this metric for Guoco Group, the formula is:

Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.03 = $433 million ÷ ($18 billion – $3.1 billion) (Based on the last twelve months to December 2023).

So, The Guoco Group has a ROCE of 3.0%. Even though this is in line with the industry average of 2.9%, it is still a low return in itself.

Check out our latest analysis for Guoco Group

While the past is not representative of the future, it can be helpful to know a company’s historical performance, which is why we have this chart above. If you want to dig deeper into Guoco Group’s past, read this free Chart showing Guoco Group’s past earnings, revenue and cash flow.

How are returns developing?

Over the past five years, Guoco Group’s ROCE and capital employed have remained broadly unchanged. This is not unusual when you consider a mature and stable company that does not reinvest its profits because it is likely past that stage of the economic cycle. With this in mind, we would not expect Guoco Group to become a multibagger in the future unless investment picks up again.

The most important things to take away

We can conclude that there are no notable changes in terms of Guoco Group’s return on equity and trends. With the stock down 33% over the past five years, investors may not be too optimistic that this trend will improve either. Therefore, based on the analysis conducted in this article, we do not believe that Guoco Group has what it takes to be a multibagger.

We also found 2 warning signals for the Guoco Group You probably want to know more about it.

If you want to look for solid companies with high returns, check out this free List of companies with good balance sheets and impressive return on equity.

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This Simply Wall St article is of a general nature. We comment based solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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