Returns On Capital At China Jushi (SHSE:600176) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think China Jushi (SHSE:600176) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for China Jushi, this is the formula:

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

0.058 = CN¥2.2b ÷ (CN¥53b - CN¥17b) (Based on the trailing twelve months to March 2024).

Therefore, China Jushi has an ROCE of 5.8%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.

View our latest analysis for China Jushi

Above you can see how the current ROCE for China Jushi compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Jushi for free.

What The Trend Of ROCE Can Tell Us

In terms of China Jushi's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.8% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

What We Can Learn From China Jushi's ROCE

We're a bit apprehensive about China Jushi because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 48% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

China Jushi does have some risks though, and we've spotted 3 warning signs for China Jushi that you might be interested in.

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.

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