Returns At Jia Yao Holdings (HKG:1626) Are On The Way Up

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Jia Yao Holdings (HKG:1626) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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).

Thus, Jia Yao Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Packaging industry.

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 of past earnings, revenue and cash flow.

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

Jia Yao Holdings is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 37% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a separate but related note, it's important to know that Jia Yao Holdings has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. 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.

The Bottom Line On Jia Yao Holdings' ROCE

To sum it up, Jia Yao Holdings is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 207% 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.

If you'd like to know about the risks facing Jia Yao Holdings, we've discovered 2 warning signs that 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.