Returns Are Gaining Momentum At Jia Yao Holdings (HKG:1626)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 on that note, Jia Yao Holdings (HKG:1626) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jia Yao Holdings:

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

0.11 = CN¥48m ÷ (CN¥1.0b - CN¥602m) (Based on the trailing twelve months to June 2023).

Therefore, Jia Yao Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 6.5% it's much better.

View 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 want to delve into the historical earnings, revenue and cash flow of Jia Yao Holdings, check out these free graphs here.

So How Is Jia Yao Holdings' ROCE Trending?

Jia Yao Holdings has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 37% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Another thing to note, Jia Yao Holdings has a high ratio of current liabilities to total assets of 59%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Jia Yao Holdings' ROCE

In summary, we're delighted to see that Jia Yao Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 520% 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.

On a final note, we found 3 warning signs for Jia Yao Holdings (2 are concerning) you should be aware of.

While Jia Yao Holdings 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. 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.