Returns Are Gaining Momentum At Jiu Rong Holdings (HKG:2358)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Jiu Rong Holdings' (HKG:2358) returns on capital, so let's have a look.

What is 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 Jiu Rong Holdings:

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

0.02 = HK$23m ÷ (HK$3.0b - HK$1.8b) (Based on the trailing twelve months to December 2021).

Therefore, Jiu Rong Holdings has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 13%.

View 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 want to delve into the historical earnings, revenue and cash flow of Jiu Rong Holdings, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that Jiu Rong Holdings is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.0% on its capital. Not only that, but the company is utilizing 480% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 62% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Jiu Rong Holdings' ROCE

Long story short, we're delighted to see that Jiu Rong Holdings' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 63% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 5 warning signs for Jiu Rong Holdings (1 makes us a bit uncomfortable) you should be aware of.

While Jiu Rong Holdings 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.