Guangdong Jushen Logistics (SZSE:001202) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Guangdong Jushen Logistics (SZSE:001202) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Guangdong Jushen Logistics, this is the formula:

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

0.099 = CN¥99m ÷ (CN¥1.2b - CN¥237m) (Based on the trailing twelve months to June 2024).

Thus, Guangdong Jushen Logistics has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Transportation industry average of 4.3%.

Check out our latest analysis for Guangdong Jushen Logistics

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

How Are Returns Trending?

On the surface, the trend of ROCE at Guangdong Jushen Logistics doesn't inspire confidence. Around five years ago the returns on capital were 49%, but since then they've fallen to 9.9%. 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.

On a side note, Guangdong Jushen Logistics has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Guangdong Jushen Logistics' ROCE

In summary, Guangdong Jushen Logistics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 20% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong Jushen Logistics has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with Guangdong Jushen Logistics (at least 1 which is concerning) , and understanding these would certainly be useful.

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.