Returns On Capital Are Showing Encouraging Signs At Jiangnan Mould & Plastic Technology (SZSE:000700)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Jiangnan Mould & Plastic Technology's (SZSE:000700) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Jiangnan Mould & Plastic Technology:

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

0.11 = CN¥422m ÷ (CN¥9.2b - CN¥5.3b) (Based on the trailing twelve months to September 2023).

Thus, Jiangnan Mould & Plastic Technology has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 6.7% it's much better.

View our latest analysis for Jiangnan Mould & Plastic Technology

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

So How Is Jiangnan Mould & Plastic Technology's ROCE Trending?

We're delighted to see that Jiangnan Mould & Plastic Technology is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 11% on its capital. While returns have increased, the amount of capital employed by Jiangnan Mould & Plastic Technology has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a separate but related note, it's important to know that Jiangnan Mould & Plastic Technology has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. 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.

The Key Takeaway

To sum it up, Jiangnan Mould & Plastic Technology is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 72% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with Jiangnan Mould & Plastic Technology and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.