Jiangsu Tongguang Electronic Wire & Cable's (SZSE:300265) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Jiangsu Tongguang Electronic Wire & Cable (SZSE:300265), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Jiangsu Tongguang Electronic Wire & Cable:

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

0.032 = CN¥78m ÷ (CN¥3.5b - CN¥1.0b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Tongguang Electronic Wire & Cable has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

See our latest analysis for Jiangsu Tongguang Electronic Wire & Cable

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Tongguang Electronic Wire & Cable.

The Trend Of ROCE

On the surface, the trend of ROCE at Jiangsu Tongguang Electronic Wire & Cable doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.2% from 7.6% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Jiangsu Tongguang Electronic Wire & Cable has done well to pay down its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Jiangsu Tongguang Electronic Wire & Cable's ROCE

To conclude, we've found that Jiangsu Tongguang Electronic Wire & Cable is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Jiangsu Tongguang Electronic Wire & Cable and understanding them should be part of your investment process.

While Jiangsu Tongguang Electronic Wire & Cable 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.