If we are to find a title that could multiply in the long run, what are the underlying trends that we need to look for? Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. However, after briefly reviewing the numbers, we don’t think Greatview Aseptic Packaging (HKG: 468) has the makings of a multi-bagger in the future, but let’s see why this may be the case.

Understanding Return on Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for Greatview Aseptic Packaging, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.18 = CN ¥ 451m ÷ (CN ¥ 3.6b – CN ¥ 1.1b) (Based on the last twelve months up to June 2021).

So, Greatview Aseptic Packaging has a ROCE of 18%. In absolute terms, this is a satisfactory performance, but compared to the packaging industry average of 12%, it is much better.

Check out our latest review for Greatview Aseptic Packaging

Above you can see how Greatview Aseptic Packaging’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can view analyst forecasts covering Greatview Aseptic Packaging here for free.

What the ROCE trend can tell us

Things have been fairly stable at Greatview Aseptic Packaging, with their capital employed and returns on that capital remaining roughly the same over the past five years. Companies with these characteristics tend to be mature and stable operations as they are past the growth phase. With that in mind, unless investments pick up in the future, we would not expect Greatview Aseptic Packaging to be a multiple bagger in the future. However, it makes sense that Greatview Aseptic Packaging paid 92% of its profits to its shareholders. If the business is in fact lacking in growth opportunities, this is one of the viable alternatives for the money.

On another note, while the trend change in ROCE may not attract attention, it’s worth noting that current liabilities have actually increased over the past five years. This is intriguing because if current liabilities had not increased to 30% of total assets, this reported ROCE would likely be less than 18% because total capital employed would be higher. The 18% ROCE could be even lower if current liabilities were not 30% of total assets, as the formula would show a broader base of total capital employed. With that in mind, just beware if this ratio increases in the future, because if it becomes particularly high, there are new elements of risk.

The key to take away

We can conclude that when it comes to Greatview Aseptic Packaging returns on capital employed and trends, there is not much change to report. Plus, the total shareholder return for the past five years has been stable, which isn’t too surprising. Overall, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re looking for, we think you might have better luck elsewhere.

Greatview Aseptic Packaging does come with some risks, however, and we have spotted 1 warning sign for Greatview Aseptic Packaging that might interest you.

Although Greatview Aseptic Packaging does not deliver the highest yield, check out this free list of companies that generate high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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