Capital Allocation Trends At Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Jonjee Hi-Tech Industrial and Commercial HoldingLtd:

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

0.14 = CN¥786m ÷ (CN¥7.5b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

Therefore, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Food industry.

See our latest analysis for Jonjee Hi-Tech Industrial and Commercial HoldingLtd

Above you can see how the current ROCE for Jonjee Hi-Tech Industrial and Commercial HoldingLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jonjee Hi-Tech Industrial and Commercial HoldingLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Jonjee Hi-Tech Industrial and Commercial HoldingLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Jonjee Hi-Tech Industrial and Commercial HoldingLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Jonjee Hi-Tech Industrial and Commercial HoldingLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 40% in the last five years. Therefore based on the analysis done in this article, we don't think Jonjee Hi-Tech Industrial and Commercial HoldingLtd has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Jonjee Hi-Tech Industrial and Commercial HoldingLtd (of which 2 can't be ignored!) that you should know about.

While Jonjee Hi-Tech Industrial and Commercial HoldingLtd 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.