Returns On Capital At Henan Jinma Energy (HKG:6885) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Henan Jinma Energy's (HKG:6885) ROCE trend, we were pretty happy with what we saw.

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. Analysts use this formula to calculate it for Henan Jinma Energy:

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

0.17 = CN¥714m ÷ (CN¥6.2b - CN¥2.1b) (Based on the trailing twelve months to June 2020).

Thus, Henan Jinma Energy has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Metals and Mining industry.

Check out our latest analysis for Henan Jinma Energy

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

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 545% in that time. 17% is a pretty standard return, and it provides some comfort knowing that Henan Jinma Energy has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Henan Jinma Energy has done well to reduce current liabilities to 34% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

To sum it up, Henan Jinma Energy has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 41% return if they held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 3 warning signs with Henan Jinma Energy and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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