Did you know that certain financial measures can provide clues about a potential multi-bagger? Among other things, we’ll want to see two things; first, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Although, when we considered Jiangnan Group (HKG: 1366), it didn’t seem to tick all of those boxes.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. To calculate this metric for the Jiangnan group, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.086 = CN ¥ 592m ÷ (CN ¥ 17b – CN ¥ 9.7b) (Based on the last twelve months up to June 2021).
So, Jiangnan Group has a ROCE of 8.6%. On its own, that’s a low number but it’s around the 10% average generated by the electrical industry.
See our latest analysis for the Jiangnan group
Historical performance is a great place to start when looking for a stock. So above you can see the gauge of Jiangnan Group’s ROCE compared to its past returns. If you want to delve into the history of Jiangnan Group earnings, income and cash flow, check out these free graphics here.
So what is the ROCE trend of Jiangnan Group?
When we looked at the ROCE trend at Jiangnan Group, we didn’t gain much trust. To be more precise, ROCE has increased by 19% over the past five years. However, as both capital employed and income have increased, it appears that the company is currently continuing to grow, resulting in short-term returns. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long run.
By the way, Jiangnan group’s current liabilities are still quite high at 59% of total assets. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.
As returns have plummeted for Jiangnan Group lately, we are encouraged to see sales increasing and the company reinvesting in its operations. Despite these promising trends, the stock has slumped 74% in the past five years, so other factors could hurt the company’s outlook. Either way, reinvesting can pay off in the long run, so we think savvy investors may want to take this action further.
On a final note, we found 3 warning signs for the Jiangnan group (2 are potentially serious) you need to be aware of.
Although the Jiangnan Group does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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