Returns On Capital At Jiangnan Group (HKG:1366) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Jiangnan Group (HKG:1366), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. The formula for this calculation on Jiangnan Group is:

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

0.064 = CN¥429m ÷ (CN¥16b - CN¥9.1b) (Based on the trailing twelve months to December 2020).

So, Jiangnan Group has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.4%.

See our latest analysis for Jiangnan Group

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'd like to look at how Jiangnan Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangnan Group Tell Us?

When we looked at the ROCE trend at Jiangnan Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.4% from 21% five years ago. However it looks like Jiangnan Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Jiangnan Group has a high ratio of current liabilities to total assets of 58%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Jiangnan Group's ROCE

Bringing it all together, while we're somewhat encouraged by Jiangnan Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 64% in the last five years. Therefore based on the analysis done in this article, we don't think Jiangnan Group has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Jiangnan Group (2 shouldn't be ignored) you should be aware of.

While Jiangnan Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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