Be Wary Of Jiangsu Boxin Investing&HoldingsLtd (SHSE:600083) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Jiangsu Boxin Investing&HoldingsLtd (SHSE:600083), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Jiangsu Boxin Investing&HoldingsLtd is:

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

0.048 = CN¥26m ÷ (CN¥1.1b - CN¥515m) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Boxin Investing&HoldingsLtd has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 7.3%.

Check out our latest analysis for Jiangsu Boxin Investing&HoldingsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Boxin Investing&HoldingsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Boxin Investing&HoldingsLtd.

What Can We Tell From Jiangsu Boxin Investing&HoldingsLtd's ROCE Trend?

When we looked at the ROCE trend at Jiangsu Boxin Investing&HoldingsLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Jiangsu Boxin Investing&HoldingsLtd has decreased its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

In summary, we're somewhat concerned by Jiangsu Boxin Investing&HoldingsLtd's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 69% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Jiangsu Boxin Investing&HoldingsLtd that we think you should be aware of.

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.

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.