Be Wary Of Liqun Commercial GroupLtd (SHSE:601366) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Liqun Commercial GroupLtd (SHSE:601366), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Liqun Commercial GroupLtd is:

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

0.032 = CN¥265m ÷ (CN¥16b - CN¥7.6b) (Based on the trailing twelve months to June 2024).

Thus, Liqun Commercial GroupLtd has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 4.2%.

See our latest analysis for Liqun Commercial GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Liqun Commercial GroupLtd's ROCE against it's prior returns. If you're interested in investigating Liqun Commercial GroupLtd's past further, check out this free graph covering Liqun Commercial GroupLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Liqun Commercial GroupLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 5.9% over the last five years. However it looks like Liqun Commercial GroupLtd 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.

Another thing to note, Liqun Commercial GroupLtd has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Liqun Commercial GroupLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Liqun Commercial GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 7.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about Liqun Commercial GroupLtd, we've spotted 3 warning signs, and 2 of them are a bit concerning.

While Liqun Commercial 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.