Here's What's Concerning About Jiangsu Ruitai New Energy Materials' (SZSE:301238) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Jiangsu Ruitai New Energy Materials (SZSE:301238), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Jiangsu Ruitai New Energy Materials is:

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

0.024 = CN¥197m ÷ (CN¥9.9b - CN¥1.7b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Ruitai New Energy Materials has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

See our latest analysis for Jiangsu Ruitai New Energy Materials

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 Ruitai New Energy Materials' past further, check out this free graph covering Jiangsu Ruitai New Energy Materials' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Jiangsu Ruitai New Energy Materials' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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, Jiangsu Ruitai New Energy 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.

The Bottom Line On Jiangsu Ruitai New Energy Materials' ROCE

We're a bit apprehensive about Jiangsu Ruitai New Energy Materials because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last year. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Jiangsu Ruitai New Energy Materials (1 is potentially serious) you should be aware of.

While Jiangsu Ruitai New Energy Materials 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.