Jiangsu TongLin ElectricLtd (SZSE:301168) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Jiangsu TongLin ElectricLtd (SZSE:301168) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Jiangsu TongLin ElectricLtd is:

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

0.052 = CN¥117m ÷ (CN¥3.5b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

So, Jiangsu TongLin ElectricLtd has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.8%.

See our latest analysis for Jiangsu TongLin ElectricLtd

In the above chart we have measured Jiangsu TongLin ElectricLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu TongLin ElectricLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Jiangsu TongLin ElectricLtd, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.2%. 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.

What We Can Learn From Jiangsu TongLin ElectricLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu TongLin ElectricLtd is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 49% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 3 warning signs for Jiangsu TongLin ElectricLtd (1 can't be ignored) you should be aware of.

While Jiangsu TongLin ElectricLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.