What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Jiangxi Copper's (HKG:358) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jiangxi Copper, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥12b ÷ (CN¥189b - CN¥80b) (Based on the trailing twelve months to March 2022).
Therefore, Jiangxi Copper has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Metals and Mining industry average it falls behind.
View our latest analysis for Jiangxi Copper
SEHK:358 Return on Capital Employed August 2nd 2022In the above chart we have measured Jiangxi Copper's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Jiangxi Copper. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 116% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a separate but related note, it's important to know that Jiangxi Copper has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
To sum it up, Jiangxi Copper has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 26% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know about the risks facing Jiangxi Copper, we've discovered 2 warning signs that you should be aware of.
While Jiangxi Copper 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.