Returns On Capital Are Showing Encouraging Signs At Jiangxi Guotai GroupLtd (SHSE:603977)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Jiangxi Guotai GroupLtd (SHSE:603977) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jiangxi Guotai GroupLtd, this is the formula:

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

0.077 = CN¥313m ÷ (CN¥5.5b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

Thus, Jiangxi Guotai GroupLtd has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

See our latest analysis for Jiangxi Guotai GroupLtd

In the above chart we have measured Jiangxi Guotai GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangxi Guotai GroupLtd .

What Does the ROCE Trend For Jiangxi Guotai GroupLtd Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.7%. 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 85%. So we're very much inspired by what we're seeing at Jiangxi Guotai GroupLtd thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 26% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Jiangxi Guotai GroupLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Jiangxi Guotai GroupLtd has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Jiangxi Guotai GroupLtd you'll probably want to know about.

While Jiangxi Guotai GroupLtd 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.