Investors Met With Slowing Returns on Capital At Jiangsu LiXing General Steel BallLtd (SZSE:300421)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Jiangsu LiXing General Steel BallLtd (SZSE:300421) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Jiangsu LiXing General Steel BallLtd is:

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

0.051 = CN¥68m ÷ (CN¥1.8b - CN¥425m) (Based on the trailing twelve months to June 2024).

Therefore, Jiangsu LiXing General Steel BallLtd has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.2%.

Check out our latest analysis for Jiangsu LiXing General Steel BallLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu LiXing General Steel BallLtd's ROCE against it's prior returns. If you're interested in investigating Jiangsu LiXing General Steel BallLtd's past further, check out this free graph covering Jiangsu LiXing General Steel BallLtd's past earnings, revenue and cash flow.

So How Is Jiangsu LiXing General Steel BallLtd's ROCE Trending?

Things have been pretty stable at Jiangsu LiXing General Steel BallLtd, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Jiangsu LiXing General Steel BallLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Key Takeaway

In summary, Jiangsu LiXing General Steel BallLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 55% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 2 warning signs for Jiangsu LiXing General Steel BallLtd (1 is a bit concerning) you should be aware of.

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.