Will The ROCE Trend At Jilin Province Chuncheng Heating (HKG:1853) Continue?

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Jilin Province Chuncheng Heating (HKG:1853) so let's look a bit deeper.

What is 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¥179m ÷ (CN¥1.9b - CN¥530m) (Based on the trailing twelve months to June 2020).

Therefore, Jilin Province Chuncheng Heating has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Water Utilities industry.

View our latest analysis for Jilin Province Chuncheng Heating

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, revenue and cash flow of Jilin Province Chuncheng Heating, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Jilin Province Chuncheng Heating. The data shows that returns on capital have increased substantially over the last three years to 13%. The amount of capital employed has increased too, by 27%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 28%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Jilin Province Chuncheng Heating has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Jilin Province Chuncheng Heating's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Jilin Province Chuncheng Heating has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 28% return over the last year. In light of that, we think it's worth looking further into this stock because if Jilin Province Chuncheng Heating can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Jilin Province Chuncheng Heating (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Jilin Province Chuncheng Heating 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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