If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Jinhua Chunguang TechnologyLtd (SHSE:603657) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jinhua Chunguang TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CN¥52m ÷ (CN¥2.0b - CN¥958m) (Based on the trailing twelve months to September 2023).
Therefore, Jinhua Chunguang TechnologyLtd has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.1%.
Above you can see how the current ROCE for Jinhua Chunguang TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jinhua Chunguang TechnologyLtd .
So How Is Jinhua Chunguang TechnologyLtd's ROCE Trending?
On the surface, the trend of ROCE at Jinhua Chunguang TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Jinhua Chunguang TechnologyLtd's current liabilities have increased over the last five years to 49% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Jinhua Chunguang TechnologyLtd is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 27% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a separate note, we've found 3 warning signs for Jinhua Chunguang TechnologyLtd you'll probably want to know about.
While Jinhua Chunguang TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.