Jiangsu Sainty (SHSE:600287) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. So on that note, Jiangsu Sainty (SHSE:600287) looks quite promising in regards to its trends of return on capital.

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 Sainty:

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

0.081 = CN¥170m ÷ (CN¥3.7b - CN¥1.7b) (Based on the trailing twelve months to September 2023).

So, Jiangsu Sainty has an ROCE of 8.1%. On its own, that's a low figure but it's around the 6.9% average generated by the Trade Distributors industry.

View our latest analysis for Jiangsu Sainty

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're interested in investigating Jiangsu Sainty's past further, check out this free graph covering Jiangsu Sainty's past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangsu Sainty Tell Us?

Jiangsu Sainty has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 98% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

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 44% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In summary, we're delighted to see that Jiangsu Sainty has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Jiangsu Sainty does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Jiangsu Sainty may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.