Chindata Group Holdings (NASDAQ:CD) does what it takes to multiply its stock price

What are the early trends to look for to identify a stock that could multiply in value over the long term? Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Speaking of which, we’ve noticed big changes in Chindata Group Holdings (NASDAQ:CD) returns on capital, so let’s take a look.

Understanding return on capital employed (ROCE)

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Chindata Group Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.033 = CN¥518m ÷ (CN¥18b – CN¥2.2b) (Based on the last twelve months to September 2021).

So, Chindata Group Holdings has a ROCE of 3.3%. Ultimately, that’s a low yield and it’s below the IT industry average of 14%.

Check out our latest analysis for Chindata Group Holdings

NasdaqGS:CD Return on Capital Employed March 1, 2022

In the chart above, we measured the past ROCE of Chindata Group Holdings against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

What does the ROCE trend tell us for the holdings of the Chindata group?

Chindata Group Holdings recently achieved profitability, so its earlier investments appear to be paying off. About two years ago, the company was generating losses, but things have reversed as it now earns 3.3% on its capital. Not only that, but the company is using 205% more capital than before, but that’s to be expected of a company trying to become profitable. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.

Chindata Group Holdings ROCE Basics

In summary, it is great to see that Chindata Group Holdings has managed to become profitable and continues to reinvest in its business. However, the stock has fallen 73% in the past year, so other areas of the business could hurt its prospects. Either way, we believe the underlying fundamentals warrant this stock being investigated further.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for Chindata Group Holdings (of which 1 is significant!) that you should know.

Although Chindata Group Holdings does not generate the highest return, check out this free list of companies that achieve 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Jack L. Goldstein