Slowing Rates Of Return At Jilin Province Chuncheng Heating (HKG:1853) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Jilin Province Chuncheng Heating (HKG:1853), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.13 = CN¥150m ÷ (CN¥3.7b - CN¥2.6b) (Based on the trailing twelve months to December 2024).

So, Jilin Province Chuncheng Heating has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Water Utilities industry.

View 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're interested in investigating Jilin Province Chuncheng Heating's past further, check out this free graph covering Jilin Province Chuncheng Heating's past earnings, revenue and cash flow.

How Are Returns Trending?

Things have been pretty stable at Jilin Province Chuncheng Heating, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Jilin Province Chuncheng Heating to be a multi-bagger going forward.

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 69% of total assets, this reported ROCE would probably be less than13% because total capital employed would be higher.The 13% ROCE could be even lower if current liabilities weren't 69% 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

In a nutshell, Jilin Province Chuncheng Heating has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 27% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Jilin Province Chuncheng Heating does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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. 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.