We Like These Underlying Return On Capital Trends At Jiangsu Seagull Cooling TowerLtd (SHSE:603269)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 when we looked at Jiangsu Seagull Cooling TowerLtd (SHSE:603269) and its trend of ROCE, we really liked what we saw.

What Is 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 Seagull Cooling TowerLtd is:

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

0.092 = CN¥102m ÷ (CN¥3.5b - CN¥2.4b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Seagull Cooling TowerLtd has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 6.1%.

View our latest analysis for Jiangsu Seagull Cooling TowerLtd

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'd like to look at how Jiangsu Seagull Cooling TowerLtd has performed in the past in other metrics, you can view this free graph of Jiangsu Seagull Cooling TowerLtd's past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Seagull Cooling TowerLtd's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 68% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

In Conclusion...

To sum it up, Jiangsu Seagull Cooling TowerLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 80% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Jiangsu Seagull Cooling TowerLtd can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Jiangsu Seagull Cooling TowerLtd that we think you should be aware of.

While Jiangsu Seagull Cooling TowerLtd 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.