JiaChen Holding Group (HKG:1937) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at JiaChen Holding Group (HKG:1937) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 JiaChen Holding Group:

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

0.043 = CN¥13m ÷ (CN¥448m - CN¥141m) (Based on the trailing twelve months to December 2022).

So, JiaChen Holding Group has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Building industry average of 7.0%.

View our latest analysis for JiaChen Holding Group

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

SWOT Analysis for JiaChen Holding Group

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at JiaChen Holding Group doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 4.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, JiaChen Holding Group has done well to pay down its current liabilities to 31% 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.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for JiaChen Holding Group have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 294% over the last three years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for JiaChen Holding Group (of which 2 are a bit concerning!) that you should know about.

While JiaChen Holding 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. 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.