The Returns On Capital At Jiangsu Jingxue Insulation TechnologyLtd (SZSE:301010) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Jiangsu Jingxue Insulation TechnologyLtd (SZSE:301010), it didn't seem to tick all of these boxes.

Understanding 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 Jiangsu Jingxue Insulation TechnologyLtd, this is the formula:

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

0.043 = CN¥37m ÷ (CN¥1.8b - CN¥928m) (Based on the trailing twelve months to September 2024).

So, Jiangsu Jingxue Insulation TechnologyLtd has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Building industry average of 7.3%.

Check out our latest analysis for Jiangsu Jingxue Insulation 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're interested in investigating Jiangsu Jingxue Insulation TechnologyLtd's past further, check out this free graph covering Jiangsu Jingxue Insulation TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangsu Jingxue Insulation TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Jiangsu Jingxue Insulation TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.3% from 14% 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.

Another thing to note, Jiangsu Jingxue Insulation TechnologyLtd has a high ratio of current liabilities to total assets of 52%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

While returns have fallen for Jiangsu Jingxue Insulation TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 11% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Jiangsu Jingxue Insulation TechnologyLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.