If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Jiangsu Jiangnan Water (SHSE:601199) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Jiangsu Jiangnan Water, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = CN¥332m ÷ (CN¥6.2b - CN¥1.2b) (Based on the trailing twelve months to March 2024).
So, Jiangsu Jiangnan Water has an ROCE of 6.7%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 5.4%.
Check out our latest analysis for Jiangsu Jiangnan Water
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Jiangnan Water's ROCE against it's prior returns. If you'd like to look at how Jiangsu Jiangnan Water has performed in the past in other metrics, you can view this free graph of Jiangsu Jiangnan Water's past earnings, revenue and cash flow.
What Does the ROCE Trend For Jiangsu Jiangnan Water Tell Us?
There are better returns on capital out there than what we're seeing at Jiangsu Jiangnan Water. Over the past five years, ROCE has remained relatively flat at around 6.7% and the business has deployed 53% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On Jiangsu Jiangnan Water's ROCE
In conclusion, Jiangsu Jiangnan Water has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 67% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing to note, we've identified 1 warning sign with Jiangsu Jiangnan Water and understanding this should be part of your investment process.
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.
About SHSE:601199
Excellent balance sheet second-rate dividend payer.
