Returns On Capital Signal Tricky Times Ahead For Jujiang Construction Group (HKG:1459)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Jujiang Construction Group (HKG:1459) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Jujiang Construction Group is:

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

0.068 = CN¥121m ÷ (CN¥5.7b - CN¥4.0b) (Based on the trailing twelve months to June 2022).

Thus, Jujiang Construction Group has an ROCE of 6.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

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.

How Are Returns Trending?

In terms of Jujiang Construction Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.8% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that Jujiang Construction Group has a current liabilities to total assets ratio of 69%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Jujiang Construction Group's ROCE

To conclude, we've found that Jujiang Construction Group is reinvesting in the business, but returns have been falling. Since the stock has declined 39% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Jujiang Construction Group has the makings of a multi-bagger.

If you want to know some of the risks facing Jujiang Construction Group we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Jujiang Construction 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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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.