Nanjing Xinjiekou Department Store (SHSE:600682) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Nanjing Xinjiekou Department Store (SHSE:600682) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Nanjing Xinjiekou Department Store, this is the formula:

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

0.035 = CN¥702m ÷ (CN¥26b - CN¥6.1b) (Based on the trailing twelve months to March 2024).

Therefore, Nanjing Xinjiekou Department Store has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.5%.

Check out our latest analysis for Nanjing Xinjiekou Department Store

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing Xinjiekou Department Store's ROCE against it's prior returns. If you'd like to look at how Nanjing Xinjiekou Department Store has performed in the past in other metrics, you can view this free graph of Nanjing Xinjiekou Department Store's past earnings, revenue and cash flow.

What Does the ROCE Trend For Nanjing Xinjiekou Department Store Tell Us?

On the surface, the trend of ROCE at Nanjing Xinjiekou Department Store doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Nanjing Xinjiekou Department Store's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 58% over the last five years, investors may not be too optimistic on this trend improving either. 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 separate note, we've found 1 warning sign for Nanjing Xinjiekou Department Store you'll probably want to know about.

While Nanjing Xinjiekou Department Store may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.