Hainan Jingliang Holdings (SZSE:000505) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Hainan Jingliang Holdings (SZSE:000505), we don't think it's current trends fit the mold of a multi-bagger.

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 Hainan Jingliang Holdings:

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

0.0037 = CN¥17m ÷ (CN¥6.6b - CN¥2.0b) (Based on the trailing twelve months to June 2024).

Therefore, Hainan Jingliang Holdings has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Food industry average of 7.4%.

View our latest analysis for Hainan Jingliang Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hainan Jingliang Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hainan Jingliang Holdings.

How Are Returns Trending?

On the surface, the trend of ROCE at Hainan Jingliang Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.4% from 6.6% five years ago. However it looks like Hainan Jingliang Holdings 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Hainan Jingliang Holdings has decreased its current liabilities to 30% 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. 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.

The Key Takeaway

In summary, Hainan Jingliang Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 10% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Hainan Jingliang Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

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.

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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.