The Returns On Capital At Jiangsu Huayang Intelligent EquipmentLtd (SZSE:301502) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Jiangsu Huayang Intelligent EquipmentLtd (SZSE:301502), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Huayang Intelligent EquipmentLtd is:

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

0.04 = CN¥33m ÷ (CN¥1.0b - CN¥219m) (Based on the trailing twelve months to September 2024).

So, Jiangsu Huayang Intelligent EquipmentLtd has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

Check out our latest analysis for Jiangsu Huayang Intelligent EquipmentLtd

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'd like to look at how Jiangsu Huayang Intelligent EquipmentLtd has performed in the past in other metrics, you can view this free graph of Jiangsu Huayang Intelligent EquipmentLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Jiangsu Huayang Intelligent EquipmentLtd's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 4.0% from 24% four years ago. However it looks like Jiangsu Huayang Intelligent EquipmentLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Jiangsu Huayang Intelligent EquipmentLtd has done well to pay down its current liabilities to 21% 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. 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 Key Takeaway

In summary, Jiangsu Huayang Intelligent EquipmentLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 1.6% in the last year to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 4 warning signs for Jiangsu Huayang Intelligent EquipmentLtd (1 shouldn't be ignored) you should be aware of.

While Jiangsu Huayang Intelligent EquipmentLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.