Here's What's Concerning About Beijing Jingkelong's (HKG:814) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Beijing Jingkelong (HKG:814) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Beijing Jingkelong is:

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

0.059 = CN¥211m ÷ (CN¥8.1b - CN¥4.5b) (Based on the trailing twelve months to March 2021).

Therefore, Beijing Jingkelong has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

Check out our latest analysis for Beijing Jingkelong

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

How Are Returns Trending?

On the surface, the trend of ROCE at Beijing Jingkelong doesn't inspire confidence. To be more specific, ROCE has fallen from 7.9% over the last five years. However it looks like Beijing Jingkelong might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Beijing Jingkelong has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Beijing Jingkelong's ROCE

To conclude, we've found that Beijing Jingkelong is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Beijing Jingkelong has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with Beijing Jingkelong (including 1 which is potentially serious) .

While Beijing Jingkelong 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. 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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