The Returns On Capital At Hunan Junxin Environmental Protection (SZSE:301109) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 Hunan Junxin Environmental Protection (SZSE:301109) 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 Hunan Junxin Environmental Protection, this is the formula:

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

0.089 = CN¥781m ÷ (CN¥9.6b - CN¥848m) (Based on the trailing twelve months to September 2023).

So, Hunan Junxin Environmental Protection has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 5.9%.

View our latest analysis for Hunan Junxin Environmental Protection

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hunan Junxin Environmental Protection's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hunan Junxin Environmental Protection.

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 12% four years ago, while the business's capital employed increased by 126%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hunan Junxin Environmental Protection's earnings and if they change as a result from the capital raise. Additionally, we found that Hunan Junxin Environmental Protection's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a related note, Hunan Junxin Environmental Protection has decreased its current liabilities to 8.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line

To conclude, we've found that Hunan Junxin Environmental Protection is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last year has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Hunan Junxin Environmental Protection and understanding it should be part of your investment process.

While Hunan Junxin Environmental Protection 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.