Jia Yao Holdings (HKG:1626) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Jia Yao Holdings (HKG:1626) and its trend of ROCE, we really liked what we saw.

We've discovered 3 warning signs about Jia Yao Holdings. View them for free.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jia Yao Holdings, this is the formula:

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

0.053 = CN¥29m ÷ (CN¥866m - CN¥324m) (Based on the trailing twelve months to December 2024).

Therefore, Jia Yao Holdings has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Packaging industry average of 4.5%.

Check out our latest analysis for Jia Yao Holdings

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

What Can We Tell From Jia Yao Holdings' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 108%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Jia Yao Holdings has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Jia Yao Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Jia Yao Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Jia Yao Holdings has. And a remarkable 195% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Jia Yao Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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.

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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.