Jianshe Industry Group (Yunnan)'s (SZSE:002265) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Jianshe Industry Group (Yunnan) (SZSE:002265) and its trend of ROCE, we really liked what we saw.

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

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. The formula for this calculation on Jianshe Industry Group (Yunnan) is:

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

0.024 = CN¥96m ÷ (CN¥7.8b - CN¥3.7b) (Based on the trailing twelve months to March 2024).

Therefore, Jianshe Industry Group (Yunnan) has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.9%.

See our latest analysis for Jianshe Industry Group (Yunnan)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Jianshe Industry Group (Yunnan) has performed in the past in other metrics, you can view this free graph of Jianshe Industry Group (Yunnan)'s past earnings, revenue and cash flow.

What Can We Tell From Jianshe Industry Group (Yunnan)'s ROCE Trend?

Jianshe Industry Group (Yunnan) has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 2.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Jianshe Industry Group (Yunnan) is utilizing 306% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 48% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

Long story short, we're delighted to see that Jianshe Industry Group (Yunnan)'s reinvestment activities have paid off and the company is now profitable. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 002265 on our platform that is definitely worth checking out.

While Jianshe Industry Group (Yunnan) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.