Jiahua Stores Holdings (HKG:602) Shareholders Will Want The ROCE Trajectory To Continue

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Jiahua Stores Holdings (HKG:602) and its trend of ROCE, we really liked what we saw.

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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 Jiahua Stores Holdings:

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

0.042 = CN¥21m ÷ (CN¥780m - CN¥283m) (Based on the trailing twelve months to June 2025).

So, Jiahua Stores Holdings has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 6.1%.

Check out our latest analysis for Jiahua Stores Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiahua Stores Holdings.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Jiahua Stores Holdings is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.2% on their capital employed. In regards to capital employed, Jiahua Stores Holdings is using 51% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 36% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In the end, Jiahua Stores Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 71% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Jiahua Stores Holdings (of which 2 are a bit unpleasant!) that you should know about.

While Jiahua Stores 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.