Returns On Capital Are Showing Encouraging Signs At Jilin Province Chuncheng Heating (HKG:1853)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Jilin Province Chuncheng Heating (HKG:1853) so let's look a bit deeper.

Understanding 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. The formula for this calculation on Jilin Province Chuncheng Heating is:

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

0.19 = CN¥207m ÷ (CN¥2.0b - CN¥880m) (Based on the trailing twelve months to June 2021).

Thus, Jilin Province Chuncheng Heating has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 7.5% it's much better.

See our latest analysis for Jilin Province Chuncheng Heating

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jilin Province Chuncheng Heating's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Jilin Province Chuncheng Heating, check out these free graphs here.

So How Is Jilin Province Chuncheng Heating's ROCE Trending?

Jilin Province Chuncheng Heating is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last four years, the ROCE has climbed 172% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 45%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

In summary, we're delighted to see that Jilin Province Chuncheng Heating has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 38% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 4 warning signs we've spotted with Jilin Province Chuncheng Heating (including 1 which doesn't sit too well with us) .

While Jilin Province Chuncheng Heating 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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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.