Has Jujiang Construction Group (HKG:1459) Got What It Takes To Become A Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Jujiang Construction Group (HKG:1459), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Jujiang Construction Group:

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

0.14 = CN¥234m ÷ (CN¥5.4b - CN¥3.8b) (Based on the trailing twelve months to June 2020).

So, Jujiang Construction Group has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10% it's much better.

Check out our latest analysis for Jujiang Construction Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jujiang Construction Group's ROCE against it's prior returns. If you're interested in investigating Jujiang Construction Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Jujiang Construction Group's ROCE Trending?

On the surface, the trend of ROCE at Jujiang Construction Group doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last five years. However it looks like Jujiang Construction 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.

On a side note, Jujiang Construction Group has done well to pay down its current liabilities to 70% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 70% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, Jujiang Construction Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 84% over the last five years. Therefore based on the analysis done in this article, we don't think Jujiang Construction Group has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for Jujiang Construction Group that we think you should be aware of.

While Jujiang Construction Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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