Jinpu Landscape ArchitectureLtd's (SZSE:301098) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Jinpu Landscape ArchitectureLtd (SZSE:301098) 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. Analysts use this formula to calculate it for Jinpu Landscape ArchitectureLtd:

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

0.052 = CN¥86m ÷ (CN¥3.4b - CN¥1.7b) (Based on the trailing twelve months to June 2024).

Therefore, Jinpu Landscape ArchitectureLtd has an ROCE of 5.2%. On its own, that's a low figure but it's around the 5.6% average generated by the Commercial Services industry.

View our latest analysis for Jinpu Landscape ArchitectureLtd

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

What Does the ROCE Trend For Jinpu Landscape ArchitectureLtd Tell Us?

On the surface, the trend of ROCE at Jinpu Landscape ArchitectureLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Jinpu Landscape ArchitectureLtd's current liabilities are still rather high at 51% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Jinpu Landscape ArchitectureLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

One final note, you should learn about the 4 warning signs we've spotted with Jinpu Landscape ArchitectureLtd (including 3 which shouldn't be ignored) .

While Jinpu Landscape ArchitectureLtd 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.