There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Hainan Jingliang Holdings (SZSE:000505) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Hainan Jingliang Holdings:

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

0.034 = CN¥157m ÷ (CN¥6.8b - CN¥2.3b) (Based on the trailing twelve months to September 2024).

So, Hainan Jingliang Holdings has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Food industry average of 6.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hainan Jingliang Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hainan Jingliang Holdings.

So How Is Hainan Jingliang Holdings' ROCE Trending?

When we looked at the ROCE trend at Hainan Jingliang Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.7% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Hainan Jingliang Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 21% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Hainan Jingliang Holdings does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

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.