JiangXi BaiSheng Intelligent Technology (SZSE:301083) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at JiangXi BaiSheng Intelligent Technology (SZSE:301083), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for JiangXi BaiSheng Intelligent Technology:

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

0.033 = CN¥27m ÷ (CN¥975m - CN¥144m) (Based on the trailing twelve months to September 2023).

Thus, JiangXi BaiSheng Intelligent Technology has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.

View our latest analysis for JiangXi BaiSheng Intelligent Technology

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

What Can We Tell From JiangXi BaiSheng Intelligent Technology's ROCE Trend?

On the surface, the trend of ROCE at JiangXi BaiSheng Intelligent Technology doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 3.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, JiangXi BaiSheng Intelligent Technology has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line

We're a bit apprehensive about JiangXi BaiSheng Intelligent Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing JiangXi BaiSheng Intelligent Technology, we've discovered 2 warning signs that you should be aware of.

While JiangXi BaiSheng Intelligent 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.