The Returns At Hainan Jinpan Smart Technology (SHSE:688676) Aren't Growing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So, when we ran our eye over Hainan Jinpan Smart Technology's (SHSE:688676) trend of ROCE, we liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hainan Jinpan Smart Technology, this is the formula:

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

0.11 = CN¥546m ÷ (CN¥8.8b - CN¥3.9b) (Based on the trailing twelve months to June 2024).

So, Hainan Jinpan Smart Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Electrical industry.

See our latest analysis for Hainan Jinpan Smart Technology

Above you can see how the current ROCE for Hainan Jinpan Smart Technology 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 Hainan Jinpan Smart Technology .

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 178% more capital into its operations. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, Hainan Jinpan Smart Technology has a high ratio of current liabilities to total assets of 45%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Hainan Jinpan Smart Technology's ROCE

The main thing to remember is that Hainan Jinpan Smart Technology has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to know some of the risks facing Hainan Jinpan Smart Technology we've found 4 warning signs (2 can't be ignored!) 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.