Returns At Jiangsu General Science Technology (SHSE:601500) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. So when we looked at Jiangsu General Science Technology (SHSE:601500) 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 yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jiangsu General Science Technology, this is the formula:

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

0.068 = CN¥520m ÷ (CN¥14b - CN¥6.3b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu General Science Technology has an ROCE of 6.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

View our latest analysis for Jiangsu General Science Technology

Above you can see how the current ROCE for Jiangsu General Science Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangsu General Science Technology for free.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.8%. The amount of capital employed has increased too, by 81%. So we're very much inspired by what we're seeing at Jiangsu General Science Technology thanks to its ability to profitably reinvest capital.

Another thing to note, Jiangsu General Science Technology has a high ratio of current liabilities to total assets of 45%. 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.

What We Can Learn From Jiangsu General Science Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Jiangsu General Science Technology has. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 3 warning signs with Jiangsu General Science Technology (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

While Jiangsu General Science Technology 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.