Capital Allocation Trends At Jiangyin Electrical AlloyLtd (SZSE:300697) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Jiangyin Electrical AlloyLtd (SZSE:300697), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Jiangyin Electrical AlloyLtd:

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

0.12 = CN¥140m ÷ (CN¥1.7b - CN¥610m) (Based on the trailing twelve months to September 2024).

Thus, Jiangyin Electrical AlloyLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.8% generated by the Electrical industry.

See our latest analysis for Jiangyin Electrical AlloyLtd

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

What Can We Tell From Jiangyin Electrical AlloyLtd's ROCE Trend?

On the surface, the trend of ROCE at Jiangyin Electrical AlloyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 22% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Jiangyin Electrical AlloyLtd's ROCE

While returns have fallen for Jiangyin Electrical AlloyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 84% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with Jiangyin Electrical AlloyLtd (including 1 which is a bit unpleasant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.