Returns On Capital At Ju Teng International Holdings (HKG:3336) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Ju Teng International Holdings (HKG:3336) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Ju Teng International Holdings:

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

0.077 = HK$623m ÷ (HK$14b - HK$6.2b) (Based on the trailing twelve months to June 2020).

Therefore, Ju Teng International Holdings has an ROCE of 7.7%. Even though it's in line with the industry average of 7.7%, it's still a low return by itself.

See our latest analysis for Ju Teng International Holdings

In the above chart we have measured Ju Teng International Holdings' 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 Ju Teng International Holdings.

The Trend Of ROCE

Over the past five years, Ju Teng International Holdings' ROCE has remained relatively flat while the business is using 29% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 7.7%, it's hard to get excited about these developments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 43% of total assets, this reported ROCE would probably be less than7.7% because total capital employed would be higher.The 7.7% ROCE could be even lower if current liabilities weren't 43% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line On Ju Teng International Holdings' ROCE

It's a shame to see that Ju Teng International Holdings is effectively shrinking in terms of its capital base. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Ju Teng International Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

While Ju Teng International 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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