Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Jiangxi Guoguang Commercial Chains (SHSE:605188) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Jiangxi Guoguang Commercial Chains, this is the formula:

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

0.026 = CN¥49m ÷ (CN¥2.8b - CN¥967m) (Based on the trailing twelve months to March 2023).

Thus, Jiangxi Guoguang Commercial Chains has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 6.1%.

See our latest analysis for Jiangxi Guoguang Commercial Chains

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

How Are Returns Trending?

On the surface, the trend of ROCE at Jiangxi Guoguang Commercial Chains doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 2.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Jiangxi Guoguang Commercial Chains has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Jiangxi Guoguang Commercial Chains' ROCE

Bringing it all together, while we're somewhat encouraged by Jiangxi Guoguang Commercial Chains' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 30% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 3 warning signs with Jiangxi Guoguang Commercial Chains (at least 2 which are significant) , and understanding them would certainly be useful.

While Jiangxi Guoguang Commercial Chains 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.