Capital Allocation Trends At Zhongjie (Jiangsu) TechnologyLtd (SZSE:301072) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Zhongjie (Jiangsu) TechnologyLtd (SZSE:301072), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Zhongjie (Jiangsu) TechnologyLtd:

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

0.02 = CN¥17m ÷ (CN¥1.1b - CN¥293m) (Based on the trailing twelve months to September 2023).

So, Zhongjie (Jiangsu) TechnologyLtd has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.8%.

Check out our latest analysis for Zhongjie (Jiangsu) TechnologyLtd

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

How Are Returns Trending?

In terms of Zhongjie (Jiangsu) TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.0% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Zhongjie (Jiangsu) TechnologyLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhongjie (Jiangsu) TechnologyLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 21% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Zhongjie (Jiangsu) TechnologyLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.