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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Jiujiang Shanshui TechnologyLtd (SZSE:301190), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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. The formula for this calculation on Jiujiang Shanshui TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CN¥102m ÷ (CN¥2.3b - CN¥343m) (Based on the trailing twelve months to June 2024).
So, Jiujiang Shanshui TechnologyLtd has an ROCE of 5.2%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Jiujiang Shanshui TechnologyLtd's past further, check out this free graph covering Jiujiang Shanshui TechnologyLtd's past earnings, revenue and cash flow.
So How Is Jiujiang Shanshui TechnologyLtd's ROCE Trending?
In terms of Jiujiang Shanshui TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 55%, but since then they've fallen to 5.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Jiujiang Shanshui TechnologyLtd has done well to pay down its current liabilities to 15% 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.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Jiujiang Shanshui TechnologyLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 25% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Jiujiang Shanshui TechnologyLtd does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are concerning...
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.
