Investors Could Be Concerned With Jiangxi Guoguang Commercial Chains' (SHSE:605188) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)?

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. Analysts use this formula to calculate it for Jiangxi Guoguang Commercial Chains:

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

0.0086 = CN¥15m ÷ (CN¥2.8b - CN¥1.0b) (Based on the trailing twelve months to September 2023).

So, Jiangxi Guoguang Commercial Chains has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 8.7%.

See 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'd like to look at how Jiangxi Guoguang Commercial Chains has performed in the past in other metrics, you can view this free graph of Jiangxi Guoguang Commercial Chains' past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangxi Guoguang Commercial Chains Tell Us?

In terms of Jiangxi Guoguang Commercial Chains' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 0.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Jiangxi Guoguang Commercial Chains has done well to pay down its current liabilities to 36% 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.

Our Take On Jiangxi Guoguang Commercial Chains' ROCE

In summary, Jiangxi Guoguang Commercial Chains is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 22% over the last three years, investors may not be too optimistic on this trend improving either. 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.

If you want to know some of the risks facing Jiangxi Guoguang Commercial Chains we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.

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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.