What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 JiaXing Gas Group (HKG:9908) 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?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for JiaXing Gas Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CN¥156m ÷ (CN¥2.6b - CN¥878m) (Based on the trailing twelve months to June 2024).
Therefore, JiaXing Gas Group has an ROCE of 9.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.6%.
Check out our latest analysis for JiaXing Gas Group
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 JiaXing Gas Group's past further, check out this free graph covering JiaXing Gas Group's past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of JiaXing Gas Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 9.1%. 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.
The Key Takeaway
To conclude, we've found that JiaXing Gas Group is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think JiaXing Gas Group has the makings of a multi-bagger.
On a final note, we found 2 warning signs for JiaXing Gas Group (1 is a bit concerning) you should be aware of.
While JiaXing Gas Group 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.