Jiangsu Jingyuan Environmental ProtectionLtd (SHSE:688096) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 briefly looking over the numbers, we don't think Jiangsu Jingyuan Environmental ProtectionLtd (SHSE:688096) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jiangsu Jingyuan Environmental ProtectionLtd, this is the formula:

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

0.0094 = CN¥12m ÷ (CN¥1.8b - CN¥574m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu Jingyuan Environmental ProtectionLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.3%.

See our latest analysis for Jiangsu Jingyuan Environmental ProtectionLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Jingyuan Environmental ProtectionLtd's ROCE against it's prior returns. If you'd like to look at how Jiangsu Jingyuan Environmental ProtectionLtd has performed in the past in other metrics, you can view this free graph of Jiangsu Jingyuan Environmental ProtectionLtd's past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Jingyuan Environmental ProtectionLtd's ROCE Trend?

When we looked at the ROCE trend at Jiangsu Jingyuan Environmental ProtectionLtd, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 0.9%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Jiangsu Jingyuan Environmental ProtectionLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Jingyuan Environmental ProtectionLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 54% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Jiangsu Jingyuan Environmental ProtectionLtd, we've spotted 4 warning signs, and 2 of them make us uncomfortable.

While Jiangsu Jingyuan Environmental ProtectionLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.