Harbin Jiuzhou GroupLtd's (SZSE:300040) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Harbin Jiuzhou GroupLtd (SZSE:300040), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Harbin Jiuzhou GroupLtd:

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

0.034 = CN¥223m ÷ (CN¥7.7b - CN¥1.2b) (Based on the trailing twelve months to September 2023).

Thus, Harbin Jiuzhou GroupLtd has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.5%.

View our latest analysis for Harbin Jiuzhou GroupLtd

Above you can see how the current ROCE for Harbin Jiuzhou 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 Harbin Jiuzhou GroupLtd .

What Does the ROCE Trend For Harbin Jiuzhou GroupLtd Tell Us?

There are better returns on capital out there than what we're seeing at Harbin Jiuzhou GroupLtd. Over the past five years, ROCE has remained relatively flat at around 3.4% and the business has deployed 157% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 16% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Harbin Jiuzhou GroupLtd's ROCE

In conclusion, Harbin Jiuzhou GroupLtd has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Harbin Jiuzhou GroupLtd does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Harbin Jiuzhou 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.