What are the first trends to look for to identify a title that could multiply over the long term? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. So when we looked Jiangxi copper (HKG: 358) and its trend of ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on Jiangxi Copper is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.097 = CN ¥ 8.6b ÷ (CN ¥ 153b – CN ¥ 64b) (Based on the last twelve months up to March 2021).
Therefore, Jiangxi Copper has a ROCE of 9.7%. On its own, that’s a low number, but it sits around the 8.5% average generated by the metals and mining industry.
See our latest analysis for Jiangxi Copper
In the graph above, we measured Jiangxi Copper’s past ROCE against its past performance, but the future is arguably more important. If you want, you can view analyst forecasts covering Jiangxi Copper here for free.
What can we say about Jiangxi Copper’s ROCE trend?
While in absolute terms it’s not a high ROCE, it is promising to see that it has moved in the right direction. Over the past five years, returns on capital employed have increased substantially to 9.7%. Basically the business is making more per dollar of capital invested and on top of that 79% more capital is also being used now. Increasing returns on an increasing amount of capital are common among multi-baggers and that is why we are impressed.
On a separate but related note, it’s important to know that Jiangxi Copper has a current liabilities to total assets ratio of 42%, which we consider to be quite high. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally, we would like this to decrease as that would mean less risky bonds.
What we can learn from Jiangxi Copper’s ROCE
To sum up, Jiangxi Copper has proven that he can reinvest in the business and generate higher returns on that capital employed, which is great. Given that the stock has returned 125% to shareholders over the past five years, it looks like investors are recognizing these changes. So, given that the stock has proven to have some promising trends, it is worth doing more research on the company to see if these trends are likely to continue.
Jiangxi copper does come with some risks, however, we have found 3 warning signs in our investment analysis, and 1 of them should not be ignored …
Although Jiangxi Copper does not generate the highest yield, check out this free list of companies that generate high returns on equity with strong balance sheets.
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