Yahoo Finance Returns On Capital At GDS Holdings (NASDAQ:GDS) Have Stalled
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating GDS Holdings (NASDAQ:GDS), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on GDS Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0084 = CN¥555m ÷ (CN¥74b - CN¥8.3b) (Based on the trailing twelve months to December 2023).
Thus, GDS Holdings has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the IT industry average of 13%.
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 for free.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at GDS Holdings. The company has employed 281% more capital in the last five years, and the returns on that capital have remained stable at 0.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In conclusion, GDS Holdings has been investing more capital into the business, but returns on that capital haven't increased. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 78% over the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
GDS Holdings does have some risks though, and we've spotted 2 warning signs for GDS Holdings that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
