Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Jiangxi Guoguang Commercial Chains (SHSE:605188) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Jiangxi Guoguang Commercial Chains is:

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

0.015 = CN¥25m ÷ (CN¥2.7b - CN¥977m) (Based on the trailing twelve months to September 2024).

So, Jiangxi Guoguang Commercial Chains has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 6.0%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangxi Guoguang Commercial Chains' ROCE against it's prior returns. If you're interested in investigating Jiangxi Guoguang Commercial Chains' past further, check out this free graph covering Jiangxi Guoguang Commercial Chains' past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangxi Guoguang Commercial Chains Tell Us?

When we looked at the ROCE trend at Jiangxi Guoguang Commercial Chains, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Jiangxi Guoguang Commercial Chains has done well to pay down its current liabilities to 36% 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 Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Jiangxi Guoguang Commercial Chains is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 7.8% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Jiangxi Guoguang Commercial Chains does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Jiangxi Guoguang Commercial Chains isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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