Returns On Capital At Jujiang Construction Group (HKG:1459) Paint A Concerning Picture

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Jujiang Construction Group (HKG:1459), we've spotted some signs that it could be struggling, so let's investigate.

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What Is Return On Capital Employed (ROCE)?

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 Jujiang Construction Group, this is the formula:

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

0.0069 = CN¥12m ÷ (CN¥6.3b - CN¥4.6b) (Based on the trailing twelve months to December 2024).

So, Jujiang Construction Group has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.6%.

Check out our latest analysis for Jujiang Construction Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jujiang Construction Group's ROCE against it's prior returns. If you'd like to look at how Jujiang Construction Group has performed in the past in other metrics, you can view this free graph of Jujiang Construction Group's past earnings, revenue and cash flow.

The Trend Of ROCE

There is reason to be cautious about Jujiang Construction Group, given the returns are trending downwards. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Jujiang Construction Group becoming one if things continue as they have.

Another thing to note, Jujiang Construction Group has a high ratio of current liabilities to total assets of 72%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Jujiang Construction Group's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 34% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Jujiang Construction Group, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.

While Jujiang Construction 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.