Returns On Capital At Jia Yao Holdings (HKG:1626) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Although, when we looked at Jia Yao Holdings (HKG:1626), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Jia Yao Holdings is:

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

0.04 = CN¥17m ÷ (CN¥1.1b - CN¥663m) (Based on the trailing twelve months to December 2022).

Therefore, Jia Yao Holdings has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Packaging industry average of 5.6%.

See 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.

What Does the ROCE Trend For Jia Yao Holdings Tell Us?

Over the past five years, Jia Yao Holdings' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Jia Yao Holdings doesn't end up being a multi-bagger in a few years time.

On a separate but related note, it's important to know that Jia Yao Holdings has a current liabilities to total assets ratio of 62%, 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.

In Conclusion...

We can conclude that in regards to Jia Yao Holdings' returns on capital employed and the trends, there isn't much change to report on. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 464% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Jia Yao Holdings we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Jia Yao Holdings 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.