Jiangsu Linyang Energy's (SHSE:601222) Returns Have Hit A Wall

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Jiangsu Linyang Energy (SHSE:601222) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Jiangsu Linyang Energy is:

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

0.062 = CN¥1.1b ÷ (CN¥25b - CN¥6.1b) (Based on the trailing twelve months to September 2024).

So, Jiangsu Linyang Energy has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

Check out our latest analysis for Jiangsu Linyang Energy

Above you can see how the current ROCE for Jiangsu Linyang Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu Linyang Energy .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Jiangsu Linyang Energy. Over the past five years, ROCE has remained relatively flat at around 6.2% and the business has deployed 21% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Jiangsu Linyang Energy's ROCE

As we've seen above, Jiangsu Linyang Energy's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 84% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 1 warning sign for Jiangsu Linyang Energy you'll probably want to know about.

While Jiangsu Linyang Energy 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.