Here's What's Concerning About Junhe Pumps HoldingLtd's (SHSE:603617) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Junhe Pumps HoldingLtd (SHSE:603617) 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?

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. To calculate this metric for Junhe Pumps HoldingLtd, this is the formula:

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

0.0041 = CN¥5.9m ÷ (CN¥2.2b - CN¥736m) (Based on the trailing twelve months to March 2024).

Thus, Junhe Pumps HoldingLtd has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

View our latest analysis for Junhe Pumps HoldingLtd

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 Junhe Pumps HoldingLtd's past further, check out this free graph covering Junhe Pumps HoldingLtd's past earnings, revenue and cash flow.

What Can We Tell From Junhe Pumps HoldingLtd's ROCE Trend?

On the surface, the trend of ROCE at Junhe Pumps HoldingLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Junhe Pumps HoldingLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 35% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Junhe Pumps HoldingLtd does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Junhe Pumps HoldingLtd 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.

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