Investors Met With Slowing Returns on Capital At Jiangxi Hongcheng EnvironmentLtd (SHSE:600461)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. That's why when we briefly looked at Jiangxi Hongcheng EnvironmentLtd's (SHSE:600461) ROCE trend, we were pretty happy with what we saw.

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 Jiangxi Hongcheng EnvironmentLtd is:

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

0.11 = CN¥1.7b ÷ (CN¥23b - CN¥8.5b) (Based on the trailing twelve months to September 2023).

Thus, Jiangxi Hongcheng EnvironmentLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Water Utilities industry.

See our latest analysis for Jiangxi Hongcheng EnvironmentLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Jiangxi Hongcheng EnvironmentLtd's past further, check out this free graph covering Jiangxi Hongcheng EnvironmentLtd's past earnings, revenue and cash flow.

What Can We Tell From Jiangxi Hongcheng EnvironmentLtd's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 184% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Jiangxi Hongcheng EnvironmentLtd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Jiangxi Hongcheng EnvironmentLtd has done well to reduce current liabilities to 37% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In the end, Jiangxi Hongcheng EnvironmentLtd has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 92% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Jiangxi Hongcheng EnvironmentLtd, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.