Capital Investments At JNBY Design (HKG:3306) Point To A Promising Future

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at JNBY Design's (HKG:3306) ROCE trend, we were very happy with what we saw.

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. The formula for this calculation on JNBY Design is:

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

0.35 = CN¥758m ÷ (CN¥3.9b - CN¥1.7b) (Based on the trailing twelve months to June 2022).

Thus, JNBY Design has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 9.4% earned by companies in a similar industry.

Check out the opportunities and risks within the HK Luxury industry.

In the above chart we have measured JNBY Design's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering JNBY Design here for free.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like JNBY Design. The company has consistently earned 35% for the last five years, and the capital employed within the business has risen 69% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If JNBY Design can keep this up, we'd be very optimistic about its future.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 45% of total assets, this reported ROCE would probably be less than35% because total capital employed would be higher.The 35% ROCE could be even lower if current liabilities weren't 45% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From JNBY Design's ROCE

In summary, we're delighted to see that JNBY Design has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last five years, the stock hasn't provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

JNBY Design does have some risks though, and we've spotted 1 warning sign for JNBY Design that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.