Some Investors May Be Worried About Wuxi JinYang New Materials' (SZSE:301210) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Wuxi JinYang New Materials (SZSE:301210) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. To calculate this metric for Wuxi JinYang New Materials, this is the formula:

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

0.018 = CN¥37m ÷ (CN¥2.4b - CN¥407m) (Based on the trailing twelve months to September 2024).

Thus, Wuxi JinYang New Materials has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

See our latest analysis for Wuxi JinYang New Materials

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

How Are Returns Trending?

When we looked at the ROCE trend at Wuxi JinYang New Materials, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.0% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Wuxi JinYang New Materials has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Wuxi JinYang New Materials' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Wuxi JinYang New Materials. Furthermore the stock has climbed 90% over the last year, 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.

If you'd like to know more about Wuxi JinYang New Materials, we've spotted 3 warning signs, and 1 of them is potentially serious.

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.