Changjiang & Jinggong Steel Building (Group) (SHSE:600496) Will Want To Turn Around Its Return Trends

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Changjiang & Jinggong Steel Building (Group) (SHSE:600496), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Changjiang & Jinggong Steel Building (Group):

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).

Therefore, 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 6.1%.

See our latest analysis for Changjiang & Jinggong Steel Building (Group)

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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Changjiang & Jinggong Steel Building (Group), we didn't gain much confidence. Around five years ago the returns on capital were 7.0%, but since then they've fallen to 3.9%. However it looks like Changjiang & Jinggong Steel Building (Group) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Key Takeaway

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 12% 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.

Changjiang & Jinggong Steel Building (Group) does have some risks though, and we've spotted 3 warning signs for Changjiang & Jinggong Steel Building (Group) that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.