Returns On Capital Signal Tricky Times Ahead For Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872), it didn't seem to tick all of these boxes.

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 Jonjee Hi-Tech Industrial and Commercial HoldingLtd:

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

0.13 = CN¥738m ÷ (CN¥6.7b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Food industry.

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

In the above chart we have measured Jonjee Hi-Tech Industrial and Commercial HoldingLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jonjee Hi-Tech Industrial and Commercial HoldingLtd for free.

What Can We Tell From Jonjee Hi-Tech Industrial and Commercial HoldingLtd's ROCE Trend?

When we looked at the ROCE trend at Jonjee Hi-Tech Industrial and Commercial HoldingLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 20% five years ago. 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'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, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has decreased its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take 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 in the last five years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

On a final note, we found 3 warning signs for Jonjee Hi-Tech Industrial and Commercial HoldingLtd (2 are a bit concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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