Tongling Jingda Special Magnet Wire (SHSE:600577) Is Reinvesting At Lower Rates Of Return

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. 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 Tongling Jingda Special Magnet Wire (SHSE:600577) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. To calculate this metric for Tongling Jingda Special Magnet Wire, this is the formula:

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

0.10 = CN¥643m ÷ (CN¥12b - CN¥5.4b) (Based on the trailing twelve months to March 2024).

Therefore, Tongling Jingda Special Magnet Wire has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Electrical industry.

Check out our latest analysis for Tongling Jingda Special Magnet Wire

Above you can see how the current ROCE for Tongling Jingda Special Magnet Wire compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tongling Jingda Special Magnet Wire for free.

So How Is Tongling Jingda Special Magnet Wire's ROCE Trending?

In terms of Tongling Jingda Special Magnet Wire's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Tongling Jingda Special Magnet Wire's current liabilities have increased over the last five years to 46% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Tongling Jingda Special Magnet Wire's ROCE

Bringing it all together, while we're somewhat encouraged by Tongling Jingda Special Magnet Wire's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 56% 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.

Tongling Jingda Special Magnet Wire does have some risks though, and we've spotted 1 warning sign for Tongling Jingda Special Magnet Wire that you might be interested in.

While Tongling Jingda Special Magnet Wire isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com