Jiangxi Hongcheng EnvironmentLtd (SHSE:600461) Hasn't Managed To Accelerate Its Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Jiangxi Hongcheng EnvironmentLtd (SHSE:600461) looks decent, right now, so lets see what the trend of returns can tell us.

What Is 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 Hongcheng EnvironmentLtd, this is the formula:

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

0.12 = CN¥1.8b ÷ (CN¥24b - CN¥8.4b) (Based on the trailing twelve months to March 2024).

So, Jiangxi Hongcheng EnvironmentLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 5.4% it's much better.

Check out our latest analysis for Jiangxi Hongcheng EnvironmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangxi Hongcheng EnvironmentLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangxi Hongcheng EnvironmentLtd.

What Does the ROCE Trend For Jiangxi Hongcheng EnvironmentLtd Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 148% more capital into its operations. 12% 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.

The Bottom Line

The main thing to remember is that Jiangxi Hongcheng EnvironmentLtd has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 134% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Jiangxi Hongcheng EnvironmentLtd does have some risks though, and we've spotted 3 warning signs for Jiangxi Hongcheng EnvironmentLtd that you might be interested in.

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.

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