Returns On Capital Signal Tricky Times Ahead For Jiangsu Teeyer Intelligent EquipmentLtd (SHSE:603273)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Jiangsu Teeyer Intelligent EquipmentLtd (SHSE:603273), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Jiangsu Teeyer Intelligent EquipmentLtd:

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

0.041 = CN¥36m ÷ (CN¥1.4b - CN¥517m) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Teeyer Intelligent EquipmentLtd has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

View our latest analysis for Jiangsu Teeyer Intelligent EquipmentLtd

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 Teeyer Intelligent EquipmentLtd has performed in the past in other metrics, you can view this free graph of Jiangsu Teeyer Intelligent EquipmentLtd's past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Teeyer Intelligent EquipmentLtd's ROCE Trend?

When we looked at the ROCE trend at Jiangsu Teeyer Intelligent EquipmentLtd, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 4.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Jiangsu Teeyer Intelligent EquipmentLtd has done well to pay down its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by Jiangsu Teeyer Intelligent EquipmentLtd's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 13% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Jiangsu Teeyer Intelligent EquipmentLtd that you might find interesting.

While Jiangsu Teeyer Intelligent EquipmentLtd 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.