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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at GDS Holdings (NASDAQ:GDS) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on GDS Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = CN¥582m ÷ (CN¥62b - CN¥8.5b) (Based on the trailing twelve months to June 2021).
Thus, GDS Holdings has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.
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?
GDS Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.1% which is a sight for sore eyes. In addition to that, GDS Holdings is employing 1,009% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
In summary, it's great to see that GDS Holdings has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last three years. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 2 warning signs facing GDS Holdings that you might find interesting.
While GDS Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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