Capital Allocation Trends At Jiangsu Yangdian Science & Technology (SZSE:301012) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Jiangsu Yangdian Science & Technology (SZSE:301012), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Jiangsu Yangdian Science & Technology is:

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

0.013 = CN¥15m ÷ (CN¥1.5b - CN¥355m) (Based on the trailing twelve months to March 2024).

So, Jiangsu Yangdian Science & Technology has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

Check out our latest analysis for Jiangsu Yangdian Science & Technology

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

What Does the ROCE Trend For Jiangsu Yangdian Science & Technology Tell Us?

When we looked at the ROCE trend at Jiangsu Yangdian Science & Technology, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 1.3%. 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.

On a side note, Jiangsu Yangdian Science & Technology has done well to pay down its current liabilities to 24% 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.

In Conclusion...

While returns have fallen for Jiangsu Yangdian Science & Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last three years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Jiangsu Yangdian Science & Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While Jiangsu Yangdian Science & Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com