Should You Be Impressed By Jujiang Construction Group's (HKG:1459) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Jujiang Construction Group (HKG:1459) 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. The formula for this calculation on Jujiang Construction Group is:

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

0.14 = 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%. On its own, that's a standard return, however it's much better than the 10% generated by the Construction industry.

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

What Can We Tell From Jujiang Construction Group's ROCE Trend?

In terms of Jujiang Construction Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 22%, but since then they've fallen to 14%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 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. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 70% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Jujiang Construction Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing Jujiang Construction Group that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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