Yields gain ground at Chindata Group Holdings (NASDAQ:CD)

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher 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.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for Chindata Group Holdings, here is the formula:

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

0.055 = CN¥806m ÷ (CN¥19b – CN¥4.1b) (Based on the last twelve months to March 2022).

Therefore, Chindata Group Holdings has a ROCE of 5.5%. Ultimately, this is poor performance and is below the IT industry average of 12%.

Check out our latest analysis for Chindata Group Holdings

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Above, you can see how Chindata Group Holdings’ current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

The ROCE trend

We are delighted to see that Chindata Group Holdings is reaping the rewards of its investments and is now generating pre-tax profits. The company was generating losses three years ago, but is now earning 5.5%, which is a feast for the eyes. And unsurprisingly, like most companies trying to break into the dark, Chindata Group Holdings is using 469% more capital than three years ago. We like this trend because it tells us that the company has profitable reinvestment opportunities, and if it continues, it can lead to multi-bagger performance.

The Key Takeaway

Overall, Chindata Group Holdings is getting a big boost from us thanks in large part to the fact that it is now profitable and reinvesting in its business. And since the stock has fallen 53% in the past year, there could be an opportunity here. It therefore seems warranted to do further research on this company and determine whether or not these trends will continue.

If you want to know more about Chindata Group Holdings, we spotted 2 warning signs, and 1 of them is concerning.

If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.

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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