If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So when we looked at Jinjian Cereals IndustryLtd (SHSE:600127) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Jinjian Cereals IndustryLtd is:

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

0.049 = CN¥43m ÷ (CN¥1.6b - CN¥783m) (Based on the trailing twelve months to December 2023).

Thus, Jinjian Cereals IndustryLtd has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.0%.

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're interested in investigating Jinjian Cereals IndustryLtd's past further, check out this free graph covering Jinjian Cereals IndustryLtd's past earnings, revenue and cash flow.

What Can We Tell From Jinjian Cereals IndustryLtd's ROCE Trend?

Shareholders will be relieved that Jinjian Cereals IndustryLtd has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.9%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 48%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

In Conclusion...

To sum it up, Jinjian Cereals IndustryLtd is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 74% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Jinjian Cereals IndustryLtd can keep these trends up, it could have a bright future ahead.

Jinjian Cereals IndustryLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Jinjian Cereals IndustryLtd 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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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.