Be Wary Of Jiangxi Guoguang Commercial Chains (SHSE:605188) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 investigating Jiangxi Guoguang Commercial Chains (SHSE:605188), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jiangxi Guoguang Commercial Chains, this is the formula:

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

0.018 = CN¥31m ÷ (CN¥2.7b - CN¥915m) (Based on the trailing twelve months to June 2024).

Thus, Jiangxi Guoguang Commercial Chains has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 6.1%.

Check out our latest analysis for Jiangxi Guoguang Commercial Chains

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangxi Guoguang Commercial Chains.

So How Is Jiangxi Guoguang Commercial Chains' ROCE Trending?

On the surface, the trend of ROCE at Jiangxi Guoguang Commercial Chains doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Jiangxi Guoguang Commercial Chains might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Jiangxi Guoguang Commercial Chains has decreased its current liabilities to 34% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Jiangxi Guoguang Commercial Chains' ROCE

Bringing it all together, while we're somewhat encouraged by Jiangxi Guoguang Commercial Chains' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last three years 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 final note, you should learn about the 4 warning signs we've spotted with Jiangxi Guoguang Commercial Chains (including 2 which are potentially serious) .

While Jiangxi Guoguang Commercial Chains isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.