Jiangxi Guoke Defence GroupLtd's (SHSE:688543) Returns On Capital Not Reflecting Well On The Business

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Jiangxi Guoke Defence GroupLtd (SHSE:688543) and its ROCE trend, we weren't exactly thrilled.

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 Guoke Defence GroupLtd is:

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

0.077 = CN¥178m ÷ (CN¥3.0b - CN¥669m) (Based on the trailing twelve months to March 2024).

So, Jiangxi Guoke Defence GroupLtd has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Aerospace & Defense industry average of 4.3%.

See our latest analysis for Jiangxi Guoke Defence GroupLtd

Above you can see how the current ROCE for Jiangxi Guoke Defence GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jiangxi Guoke Defence GroupLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Jiangxi Guoke Defence GroupLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.7% from 19% five years ago. 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.

On a side note, Jiangxi Guoke Defence GroupLtd has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. 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.

Our Take On Jiangxi Guoke Defence GroupLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangxi Guoke Defence GroupLtd. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Jiangxi Guoke Defence GroupLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 688543 on our platform quite valuable.

While Jiangxi Guoke Defence GroupLtd 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.