To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Jia Yao Holdings' (HKG:1626) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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 Jia Yao Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = CN¥158m ÷ (CN¥1.4b - CN¥854m) (Based on the trailing twelve months to June 2024).
Thus, Jia Yao Holdings has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 6.4% earned by companies in a similar industry.
See our latest analysis for Jia Yao Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jia Yao Holdings' ROCE against it's prior returns. If you're interested in investigating Jia Yao Holdings' past further, check out this free graph covering Jia Yao Holdings' past earnings, revenue and cash flow.
So How Is Jia Yao Holdings' ROCE Trending?
We're delighted to see that Jia Yao Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 27% which is a sight for sore eyes. Not only that, but the company is utilizing 133% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Another thing to note, Jia Yao Holdings has a high ratio of current liabilities to total assets of 60%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Jia Yao Holdings' ROCE
To the delight of most shareholders, Jia Yao Holdings has now broken into profitability. Since the stock has returned a staggering 194% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Jia Yao Holdings can keep these trends up, it could have a bright future ahead.
On a final note, we found 2 warning signs for Jia Yao Holdings (1 can't be ignored) you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.