Jiu Rong Holdings (HKG:2358) Is Looking To Continue Growing Its 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Jiu Rong Holdings' (HKG:2358) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Jiu Rong Holdings:

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

0.037 = HK$42m ÷ (HK$2.7b - HK$1.5b) (Based on the trailing twelve months to December 2020).

So, Jiu Rong Holdings has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 13%.

See our latest analysis for Jiu Rong Holdings

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

The Trend Of ROCE

The fact that Jiu Rong Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 3.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Jiu Rong Holdings is utilizing 691% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 58% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

Overall, Jiu Rong Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 30% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Jiu Rong Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

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. 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.
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