There Are Reasons To Feel Uneasy About Jiangsu Guomao Reducer's (SHSE:603915) Returns On Capital

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Jiangsu Guomao Reducer (SHSE:603915), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Jiangsu Guomao Reducer, this is the formula:

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

0.089 = CN¥333m ÷ (CN¥5.2b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

So, Jiangsu Guomao Reducer has an ROCE of 8.9%. On its own that's a low return, but compared to the average of 5.3% generated by the Machinery industry, it's much better.

See our latest analysis for Jiangsu Guomao Reducer

Above you can see how the current ROCE for Jiangsu Guomao Reducer compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Guomao Reducer .

What Does the ROCE Trend For Jiangsu Guomao Reducer Tell Us?

When we looked at the ROCE trend at Jiangsu Guomao Reducer, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.9%. 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.

Our Take On Jiangsu Guomao Reducer's ROCE

In summary, Jiangsu Guomao Reducer is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 116% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Jiangsu Guomao Reducer does have some risks though, and we've spotted 1 warning sign for Jiangsu Guomao Reducer that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.