Shenzhen Jasic TechnologyLtd's (SZSE:300193) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Shenzhen Jasic TechnologyLtd (SZSE:300193) so let's look a bit deeper.

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. To calculate this metric for Shenzhen Jasic TechnologyLtd, this is the formula:

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

0.074 = CN¥165m ÷ (CN¥2.9b - CN¥679m) (Based on the trailing twelve months to June 2024).

Therefore, Shenzhen Jasic TechnologyLtd has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.5%.

See our latest analysis for Shenzhen Jasic 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 Shenzhen Jasic TechnologyLtd has performed in the past in other metrics, you can view this free graph of Shenzhen Jasic TechnologyLtd's past earnings, revenue and cash flow.

So How Is Shenzhen Jasic TechnologyLtd's ROCE Trending?

Shenzhen Jasic TechnologyLtd is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 52% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 23% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On Shenzhen Jasic TechnologyLtd's ROCE

As discussed above, Shenzhen Jasic TechnologyLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has only returned 23% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching Shenzhen Jasic TechnologyLtd, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Shenzhen Jasic TechnologyLtd 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.