The Returns On Capital At Jiangsu Riying ElectronicsLtd (SHSE:603286) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after briefly looking over the numbers, we don't think Jiangsu Riying ElectronicsLtd (SHSE:603286) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jiangsu Riying ElectronicsLtd:

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

0.022 = CN¥20m ÷ (CN¥1.8b - CN¥854m) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Riying ElectronicsLtd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

See our latest analysis for Jiangsu Riying ElectronicsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Riying ElectronicsLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Riying ElectronicsLtd.

What Does the ROCE Trend For Jiangsu Riying ElectronicsLtd Tell Us?

When we looked at the ROCE trend at Jiangsu Riying ElectronicsLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.0% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 49%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.2%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

To conclude, we've found that Jiangsu Riying ElectronicsLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Jiangsu Riying ElectronicsLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Jiangsu Riying ElectronicsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.