Investors Met With Slowing Returns on Capital At Jiangxi Special Electric MotorLtd (SZSE:002176)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Jiangxi Special Electric MotorLtd (SZSE:002176), it didn't seem to tick all of these boxes.

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 Jiangxi Special Electric MotorLtd:

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

0.10 = CN¥517m ÷ (CN¥6.6b - CN¥1.7b) (Based on the trailing twelve months to September 2023).

Thus, Jiangxi Special Electric MotorLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.4% it's much better.

See our latest analysis for Jiangxi Special Electric MotorLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangxi Special Electric MotorLtd's ROCE against it's prior returns. If you're interested in investigating Jiangxi Special Electric MotorLtd's past further, check out this free graph covering Jiangxi Special Electric MotorLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Jiangxi Special Electric MotorLtd's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Jiangxi Special Electric MotorLtd doesn't end up being a multi-bagger in a few years time.

On a side note, Jiangxi Special Electric MotorLtd has done well to reduce current liabilities to 26% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Jiangxi Special Electric MotorLtd's ROCE

In summary, Jiangxi Special Electric MotorLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with Jiangxi Special Electric MotorLtd and understanding it should be part of your investment process.

While Jiangxi Special Electric MotorLtd 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.