JiangSu Zhenjiang New Energy Equipment's (SHSE:603507) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Zhenjiang New Energy Equipment (SHSE:603507) 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 Zhenjiang New Energy Equipment:

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

0.13 = CN¥451m ÷ (CN¥6.3b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

So, JiangSu Zhenjiang New Energy Equipment has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.3% it's much better.

Check out our latest analysis for JiangSu Zhenjiang New Energy Equipment

In the above chart we have measured JiangSu Zhenjiang New Energy Equipment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering JiangSu Zhenjiang New Energy Equipment for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at JiangSu Zhenjiang New Energy Equipment are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. The amount of capital employed has increased too, by 139%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, JiangSu Zhenjiang New Energy Equipment has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On JiangSu Zhenjiang New Energy Equipment's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what JiangSu Zhenjiang New Energy Equipment has. Since the stock has returned a solid 55% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing JiangSu Zhenjiang New Energy Equipment we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.