If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Jiangxi Guoguang Commercial Chains (SHSE:605188), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Jiangxi Guoguang Commercial Chains is:

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

0.014 = CN¥25m ÷ (CN¥2.8b - CN¥1.0b) (Based on the trailing twelve months to September 2023).

So, Jiangxi Guoguang Commercial Chains has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 7.0%.

View our latest analysis for Jiangxi Guoguang Commercial Chains

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

What Can We Tell From Jiangxi Guoguang Commercial Chains' ROCE Trend?

When we looked at the ROCE trend at Jiangxi Guoguang Commercial Chains, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Jiangxi Guoguang Commercial Chains might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Jiangxi Guoguang Commercial Chains has decreased its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Jiangxi Guoguang Commercial Chains is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 5.6% over the last three years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing Jiangxi Guoguang Commercial Chains we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Jiangxi Guoguang Commercial Chains may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.