Hefei Jingsong Intelligent TechnologyLtd (SHSE:688251) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Hefei Jingsong Intelligent TechnologyLtd (SHSE:688251) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Hefei Jingsong Intelligent TechnologyLtd, this is the formula:

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

0.053 = CN¥42m ÷ (CN¥1.4b - CN¥634m) (Based on the trailing twelve months to December 2023).

So, Hefei Jingsong Intelligent TechnologyLtd has an ROCE of 5.3%. On its own, that's a low figure but it's around the 6.1% average generated by the Machinery industry.

See our latest analysis for Hefei Jingsong Intelligent TechnologyLtd

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

What Does the ROCE Trend For Hefei Jingsong Intelligent TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Hefei Jingsong Intelligent TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Hefei Jingsong Intelligent TechnologyLtd has done well to pay down its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Hefei Jingsong Intelligent TechnologyLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hefei Jingsong Intelligent TechnologyLtd. These growth trends haven't led to growth returns though, since the stock has fallen 46% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 2 warning signs with Hefei Jingsong Intelligent TechnologyLtd and understanding these should be part of your investment process.

While Hefei Jingsong Intelligent TechnologyLtd 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.