Returns On Capital Are Showing Encouraging Signs At Gulf Resources (NASDAQ:GURE)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Gulf Resources' (NASDAQ:GURE) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Gulf Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = US$9.7m ÷ (US$278m - US$9.7m) (Based on the trailing twelve months to June 2023).
Thus, Gulf Resources has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.
View our latest analysis for Gulf Resources
Historical performance is a great place to start when researching a stock so above you can see the gauge for Gulf Resources' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gulf Resources, check out these free graphs here.
What Can We Tell From Gulf Resources' ROCE Trend?
It's great to see that Gulf Resources has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 3.6% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 27%. Gulf Resources could be selling under-performing assets since the ROCE is improving.
What We Can Learn From Gulf Resources' ROCE
In a nutshell, we're pleased to see that Gulf Resources has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 66% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we've found 2 warning signs for Gulf Resources that we think you should be aware of.
While Gulf Resources 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.
