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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Jointo Energy Investment Hebei (SZSE:000600), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Jointo Energy Investment Hebei is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0011 = CN¥36m ÷ (CN¥38b - CN¥6.4b) (Based on the trailing twelve months to September 2023).
Thus, Jointo Energy Investment Hebei has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.6%.
See our latest analysis for Jointo Energy Investment Hebei
In the above chart we have measured Jointo Energy Investment Hebei's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Jointo Energy Investment Hebei.
What Does the ROCE Trend For Jointo Energy Investment Hebei Tell Us?
On the surface, the trend of ROCE at Jointo Energy Investment Hebei doesn't inspire confidence. To be more specific, ROCE has fallen from 4.3% over the last five years. However it looks like Jointo Energy Investment Hebei 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 side note, Jointo Energy Investment Hebei has done well to pay down its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Jointo Energy Investment Hebei's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 16% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing: We've identified 3 warning signs with Jointo Energy Investment Hebei (at least 2 which are significant) , and understanding these would certainly be useful.
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.
