Jiujiuwang Food International (HKG:1927) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Jiujiuwang Food International (HKG:1927) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Jiujiuwang Food International:

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

0.093 = CN¥38m ÷ (CN¥693m - CN¥280m) (Based on the trailing twelve months to June 2023).

Therefore, Jiujiuwang Food International has an ROCE of 9.3%. Even though it's in line with the industry average of 9.3%, it's still a low return by itself.

See our latest analysis for Jiujiuwang Food International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiujiuwang Food International's ROCE against it's prior returns. If you'd like to look at how Jiujiuwang Food International has performed in the past in other metrics, you can view this free graph of Jiujiuwang Food International's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Jiujiuwang Food International's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 33% over the last five years. However it looks like Jiujiuwang Food International 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Jiujiuwang Food International has decreased its current liabilities to 40% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

To conclude, we've found that Jiujiuwang Food International is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 5 warning signs with Jiujiuwang Food International (at least 3 which make us uncomfortable) , and understanding these would certainly be useful.

While Jiujiuwang Food International 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.