# Jiangnan Group Limited (HKG:1366): The Return Story

Jiangnan Group stock represents an ownership share in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Jiangnan Group, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

### ROCE: Explanation and Calculation

Choosing to invest in Jiangnan Group comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Jiangnan Group’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Jiangnan Group’s ROCE for you below:

ROCE Calculation for 1366

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = CN¥198m ÷ (CN¥14.1b – CN¥8.8b) = 3.7%

As you can see, 1366 earned HK\$3.7 from every HK\$100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Jiangnan Group is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

### Why is this the case?

Jiangnan Group’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Jiangnan Group is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of 1366’s ROCE and understand what is happening to the individual components. Looking three years in the past, it is evident that 1366’s ROCE has deteriorated from 20%, indicating the company’s capital returns have declined. Over the same period, EBT went from CN¥809m to CN¥198m and capital employed has increased due to an increase in total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

### Next Steps

1366’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

1. Future Outlook: What are well-informed industry analysts predicting for 1366’s future growth? Take a look at our free research report of analyst consensus for 1366’s outlook.
2. Valuation: What is 1366 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether 1366 is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.