Slowing Rates Of Return At Jiangxi Copper (HKG:358) Leave Little Room For Excitement

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Jiangxi Copper (HKG:358), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Jiangxi Copper, this is the formula:

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

0.07 = CN¥7.4b ÷ (CN¥190b - CN¥84b) (Based on the trailing twelve months to March 2023).

Thus, Jiangxi Copper has an ROCE of 7.0%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 8.0%.

View our latest analysis for Jiangxi Copper

In the above chart we have measured Jiangxi Copper's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Jiangxi Copper.

SWOT Analysis for Jiangxi Copper

So How Is Jiangxi Copper's ROCE Trending?

There are better returns on capital out there than what we're seeing at Jiangxi Copper. Over the past five years, ROCE has remained relatively flat at around 7.0% and the business has deployed 95% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Jiangxi Copper's current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In conclusion, Jiangxi Copper has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 22% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for Jiangxi Copper that we think you should be aware of.

While Jiangxi Copper 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.