If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, China Jicheng Holdings (HKG:1027) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for China Jicheng Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = CN¥14m ÷ (CN¥400m - CN¥148m) (Based on the trailing twelve months to December 2024).
So, China Jicheng Holdings has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 13%.
See our latest analysis for China Jicheng Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Jicheng Holdings' ROCE against it's prior returns. If you're interested in investigating China Jicheng Holdings' past further, check out this free graph covering China Jicheng Holdings' past earnings, revenue and cash flow.
The Trend Of ROCE
You'd find it hard not to be impressed with the ROCE trend at China Jicheng Holdings. The figures show that over the last five years, returns on capital have grown by 487%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, China Jicheng Holdings appears to been achieving more with less, since the business is using 46% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
In Conclusion...
In summary, it's great to see that China Jicheng Holdings has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we've identified 2 warning signs with China Jicheng Holdings and understanding these should be part of your investment process.
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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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.