If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
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 Jonjee Hi-Tech Industrial and Commercial HoldingLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥679m ÷ (CN¥6.6b - CN¥1.3b) (Based on the trailing twelve months to September 2023).
Thus, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.6% it's much better.
See our latest analysis for Jonjee Hi-Tech Industrial and Commercial HoldingLtd
In the above chart we have measured Jonjee Hi-Tech Industrial and Commercial HoldingLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Jonjee Hi-Tech Industrial and Commercial HoldingLtd.
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at Jonjee Hi-Tech Industrial and Commercial HoldingLtd, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Jonjee Hi-Tech Industrial and Commercial HoldingLtd to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Jonjee Hi-Tech Industrial and Commercial HoldingLtd has been paying out a decent 35% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Key Takeaway
In summary, Jonjee Hi-Tech Industrial and Commercial HoldingLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 31% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a separate note, we've found 1 warning sign for Jonjee Hi-Tech Industrial and Commercial HoldingLtd you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.