Chengdu Leejun Industrial's (SZSE:002651) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Chengdu Leejun Industrial (SZSE:002651) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Chengdu Leejun Industrial, this is the formula:

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

0.057 = CN¥158m ÷ (CN¥3.4b - CN¥648m) (Based on the trailing twelve months to December 2023).

Therefore, Chengdu Leejun Industrial has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.1%.

Check out our latest analysis for Chengdu Leejun Industrial

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're interested in investigating Chengdu Leejun Industrial's past further, check out this free graph covering Chengdu Leejun Industrial's past earnings, revenue and cash flow.

How Are Returns Trending?

The returns on capital haven't changed much for Chengdu Leejun Industrial in recent years. The company has employed 39% more capital in the last five years, and the returns on that capital have remained stable at 5.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Chengdu Leejun Industrial's ROCE

Long story short, while Chengdu Leejun Industrial has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 2.5% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, Chengdu Leejun Industrial does come with some risks, and we've found 2 warning signs that you should be aware of.

While Chengdu Leejun Industrial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.