Returns On Capital Are Showing Encouraging Signs At Jinhui Holdings (HKG:137)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Jinhui Holdings' (HKG:137) returns on capital, so let's have a look.

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 Jinhui Holdings is:

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

0.066 = HK$259m ÷ (HK$4.4b - HK$510m) (Based on the trailing twelve months to December 2022).

Therefore, Jinhui Holdings has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Shipping industry average of 15%.

View our latest analysis for Jinhui Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jinhui Holdings' ROCE against it's prior returns. If you'd like to look at how Jinhui Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Jinhui Holdings' ROCE Trending?

The fact that Jinhui Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 6.6% which is a sight for sore eyes. In addition to that, Jinhui Holdings is employing 49% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Our Take On Jinhui Holdings' ROCE

Overall, Jinhui Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 2 warning signs for Jinhui Holdings (1 is potentially serious) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.