Yahoo Finance Here’s What’s Happening With Returns At GDS Holdings (NASDAQ:GDS)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at GDS Holdings (NASDAQ:GDS) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for GDS Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥585m ÷ (CN¥32b - CN¥4.0b) (Based on the trailing twelve months to March 2020).
So, GDS Holdings has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the IT industry average of 10%.
See our latest analysis for GDS Holdings
Above you can see how the current ROCE for GDS Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering GDS Holdings here for free.
What Does the ROCE Trend For GDS Holdings Tell Us?
We're delighted to see that GDS Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 2.1% which is a sight for sore eyes. In addition to that, GDS Holdings is employing 753% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
What We Can Learn From GDS Holdings' ROCE
To the delight of most shareholders, GDS Holdings has now broken into profitability. Since the stock has returned a staggering 800% to shareholders over the last three years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if GDS Holdings can keep these trends up, it could have a bright future ahead.
On a final note, we found 3 warning signs for GDS Holdings (1 is a bit concerning) you should be aware of.
While GDS Holdings 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.
This article by Simply Wall St is general in nature. 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.
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