Be Wary Of Jinhai International Group Holdings (HKG:2225) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Jinhai International Group Holdings (HKG:2225), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jinhai International Group Holdings, this is the formula:

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

0.022 = S$572k ÷ (S$40m - S$13m) (Based on the trailing twelve months to June 2022).

Thus, Jinhai International Group Holdings has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 9.4%.

Check out our latest analysis for Jinhai International Group Holdings

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jinhai International Group Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 2.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Jinhai International Group Holdings is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 15% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Jinhai International Group Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Jinhai International Group Holdings 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.