If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Jiangsu LiXing General Steel BallLtd (SZSE:300421), it didn't seem to tick all of these boxes.
What Is 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. To calculate this metric for Jiangsu LiXing General Steel BallLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = CN¥74m ÷ (CN¥1.9b - CN¥561m) (Based on the trailing twelve months to September 2024).
So, Jiangsu LiXing General Steel BallLtd has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.1%.
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 Jiangsu LiXing General Steel BallLtd's past further, check out this free graph covering Jiangsu LiXing General Steel BallLtd's past earnings, revenue and cash flow.
So How Is Jiangsu LiXing General Steel BallLtd's ROCE Trending?
Things have been pretty stable at Jiangsu LiXing General Steel BallLtd, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Jiangsu LiXing General Steel BallLtd to be a multi-bagger going forward.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 30% of total assets, this reported ROCE would probably be less than5.6% because total capital employed would be higher.The 5.6% ROCE could be even lower if current liabilities weren't 30% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
Our Take On Jiangsu LiXing General Steel BallLtd's ROCE
We can conclude that in regards to Jiangsu LiXing General Steel BallLtd's returns on capital employed and the trends, there isn't much change to report on. Yet to long term shareholders the stock has gifted them an incredible 130% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 3 warning signs facing Jiangsu LiXing General Steel BallLtd that you might find interesting.
While Jiangsu LiXing General Steel BallLtd 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.
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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.
