To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Jonjee Hi-Tech Industrial and Commercial HoldingLtd:

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

0.13 = CN¥738m ÷ (CN¥6.7b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

Thus, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.6% it's much better.

Above you can see how the current ROCE for Jonjee Hi-Tech Industrial and Commercial HoldingLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jonjee Hi-Tech Industrial and Commercial HoldingLtd for free.

How Are Returns Trending?

In terms of Jonjee Hi-Tech Industrial and Commercial HoldingLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 13%. However it looks like Jonjee Hi-Tech Industrial and Commercial HoldingLtd 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has done well to pay down its current liabilities to 17% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Jonjee Hi-Tech Industrial and Commercial HoldingLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Jonjee Hi-Tech Industrial and Commercial HoldingLtd we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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