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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Jiangxi Guoke Defence GroupLtd (SHSE:688543) 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 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. To calculate this metric for Jiangxi Guoke Defence GroupLtd, this is the formula:

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

0.087 = CN¥199m ÷ (CN¥3.0b - CN¥665m) (Based on the trailing twelve months to September 2024).

Thus, Jiangxi Guoke Defence GroupLtd has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 4.4% generated by the Aerospace & Defense industry, it's much better.

Check out 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'd like, you can check out the forecasts from the analysts covering Jiangxi Guoke Defence GroupLtd for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Jiangxi Guoke Defence GroupLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.7% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Jiangxi Guoke Defence GroupLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiangxi Guoke Defence GroupLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 46% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Jiangxi Guoke Defence GroupLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.