JiaChen Holding Group's (HKG:1937) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at JiaChen Holding Group (HKG:1937) and its ROCE trend, we weren't exactly thrilled.

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What Is 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. 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)

0.05 = CN¥16m ÷ (CN¥492m - CN¥167m) (Based on the trailing twelve months to December 2024).

Thus, JiaChen Holding Group has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Building industry average of 9.3%.

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

What Can We Tell From JiaChen Holding Group's ROCE Trend?

In terms of JiaChen Holding Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like JiaChen Holding 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'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, JiaChen Holding Group has done well to pay down its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From JiaChen Holding Group's ROCE

To conclude, we've found that JiaChen Holding Group is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 177% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for JiaChen Holding Group (of which 1 doesn't sit too well with us!) that you should know about.

While JiaChen Holding 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.