The Returns On Capital At Jiugui Liquor (SZSE:000799) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Jiugui Liquor (SZSE:000799), it didn't seem to tick all of these boxes.

What Is 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 Jiugui Liquor is:

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

0.071 = CN¥311m ÷ (CN¥5.6b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Thus, Jiugui Liquor has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 16%.

Check out our latest analysis for Jiugui Liquor

In the above chart we have measured Jiugui Liquor'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 Jiugui Liquor .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jiugui Liquor, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Jiugui Liquor's ROCE

In summary, we're somewhat concerned by Jiugui Liquor's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 43% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Jiugui Liquor (at least 2 which are significant) , and understanding these would certainly be useful.

While Jiugui Liquor 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.