Returns On Capital Signal Tricky Times Ahead For Jinpu Landscape ArchitectureLtd (SZSE:301098)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at Jinpu Landscape ArchitectureLtd (SZSE:301098) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.071 = CN¥119m ÷ (CN¥3.2b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

So, Jinpu Landscape ArchitectureLtd has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.5% generated by the Commercial Services industry, it's much better.

See 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'd like to look at how Jinpu Landscape ArchitectureLtd has performed in the past in other metrics, you can view this free graph of Jinpu Landscape ArchitectureLtd's past earnings, revenue and cash flow.

What Can We Tell From Jinpu Landscape ArchitectureLtd's ROCE Trend?

When we looked at the ROCE trend at Jinpu Landscape ArchitectureLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.1% from 20% five years ago. 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 side note, Jinpu Landscape ArchitectureLtd's current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

While returns have fallen for Jinpu Landscape ArchitectureLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 32% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Jinpu Landscape ArchitectureLtd (of which 2 don't sit too well with us!) that you should know about.

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.