Be Wary Of Jinglv Environment Science and Technology (SZSE:001230) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Jinglv Environment Science and Technology (SZSE:001230) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jinglv Environment Science and Technology, this is the formula:

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

0.066 = CN¥165m ÷ (CN¥2.9b - CN¥418m) (Based on the trailing twelve months to September 2023).

So, Jinglv Environment Science and Technology has an ROCE of 6.6%. On its own, that's a low figure but it's around the 5.5% average generated by the Commercial Services industry.

Check out our latest analysis for Jinglv Environment Science and Technology

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jinglv Environment Science and Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last four years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Jinglv Environment Science and Technology has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Jinglv Environment Science and Technology's ROCE

In summary, Jinglv Environment Science and Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 35% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Jinglv Environment Science and Technology does have some risks though, and we've spotted 1 warning sign for Jinglv Environment Science and Technology that you might be interested in.

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.