Jianglong Shipbuilding's (SZSE:300589) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Jianglong Shipbuilding (SZSE:300589) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Jianglong Shipbuilding is:

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

0.03 = CN¥26m ÷ (CN¥2.2b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Thus, Jianglong Shipbuilding has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

Check out our latest analysis for Jianglong Shipbuilding

In the above chart we have measured Jianglong Shipbuilding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jianglong Shipbuilding for free.

The Trend Of ROCE

When we looked at the ROCE trend at Jianglong Shipbuilding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.0% from 12% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Jianglong Shipbuilding's current liabilities are still rather high at 62% of total assets. 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.

What We Can Learn From Jianglong Shipbuilding's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jianglong Shipbuilding is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 69% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a separate note, we've found 1 warning sign for Jianglong Shipbuilding you'll probably want to know about.

While Jianglong Shipbuilding 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.