Jiangxi Ganyue ExpresswayLTD (SHSE:600269) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Jiangxi Ganyue ExpresswayLTD (SHSE:600269) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Jiangxi Ganyue ExpresswayLTD:

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

0.071 = CN¥1.9b ÷ (CN¥36b - CN¥9.1b) (Based on the trailing twelve months to June 2024).

Therefore, Jiangxi Ganyue ExpresswayLTD has an ROCE of 7.1%. In absolute terms, that's a low return, but it's much better than the Infrastructure industry average of 4.9%.

View our latest analysis for Jiangxi Ganyue ExpresswayLTD

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

How Are Returns Trending?

Jiangxi Ganyue ExpresswayLTD has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 40% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. 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.

What We Can Learn From Jiangxi Ganyue ExpresswayLTD's ROCE

To bring it all together, Jiangxi Ganyue ExpresswayLTD has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 28% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 2 warning signs with Jiangxi Ganyue ExpresswayLTD and understanding these should be part of your investment process.

While Jiangxi Ganyue ExpresswayLTD 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.