Why We Like The Returns At Jiangsu King's Luck Brewery Ltd (SHSE:603369)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Jiangsu King's Luck Brewery Ltd (SHSE:603369) looks great, so lets see what the trend can tell us.

Understanding 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. The formula for this calculation on Jiangsu King's Luck Brewery Ltd is:

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

0.30 = CN¥4.4b ÷ (CN¥21b - CN¥6.3b) (Based on the trailing twelve months to June 2024).

Therefore, Jiangsu King's Luck Brewery Ltd has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.

View our latest analysis for Jiangsu King's Luck Brewery Ltd

In the above chart we have measured Jiangsu King's Luck Brewery Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu King's Luck Brewery Ltd .

The Trend Of ROCE

We like the trends that we're seeing from Jiangsu King's Luck Brewery Ltd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 116%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 30% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Jiangsu King's Luck Brewery Ltd's ROCE

To sum it up, Jiangsu King's Luck Brewery Ltd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 55% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Jiangsu King's Luck Brewery Ltd we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.