Jiumaojiu International Holdings (HKG:9922) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Jiumaojiu International Holdings (HKG:9922) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Jiumaojiu International Holdings is:

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

0.13 = CN¥588m ÷ (CN¥5.2b - CN¥740m) (Based on the trailing twelve months to June 2021).

Therefore, Jiumaojiu International Holdings has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 2.6% it's much better.

See our latest analysis for Jiumaojiu International Holdings

Above you can see how the current ROCE for Jiumaojiu International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Jiumaojiu International Holdings.

What The Trend Of ROCE Can Tell Us

In terms of Jiumaojiu International Holdings' historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 13% from 24% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Jiumaojiu International Holdings has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Jiumaojiu International Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiumaojiu International Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 7.3% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 1 warning sign for Jiumaojiu International Holdings that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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