If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Changjiang & Jinggong Steel Building (Group) (SHSE:600496), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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 Changjiang & Jinggong Steel Building (Group) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = CN¥433m ÷ (CN¥24b - CN¥12b) (Based on the trailing twelve months to June 2024).
So, Changjiang & Jinggong Steel Building (Group) has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.7%.
In the above chart we have measured Changjiang & Jinggong Steel Building (Group)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Changjiang & Jinggong Steel Building (Group) for free.
The Trend Of ROCE
In terms of Changjiang & Jinggong Steel Building (Group)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.0% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 separate but related note, it's important to know that Changjiang & Jinggong Steel Building (Group) has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Changjiang & Jinggong Steel Building (Group)'s ROCE
To conclude, we've found that Changjiang & Jinggong Steel Building (Group) is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 5.5% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a separate note, we've found 3 warning signs for Changjiang & Jinggong Steel Building (Group) you'll probably want to know about.
While Changjiang & Jinggong Steel Building (Group) 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.
