Here's What's Concerning About Jiangsu Sanfame Polyester MaterialLtd's (SHSE:600370) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Jiangsu Sanfame Polyester MaterialLtd (SHSE:600370) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Jiangsu Sanfame Polyester MaterialLtd:

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

0.011 = CN¥103m ÷ (CN¥16b - CN¥6.3b) (Based on the trailing twelve months to September 2023).

So, Jiangsu Sanfame Polyester MaterialLtd has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.0%.

View our latest analysis for Jiangsu Sanfame Polyester MaterialLtd

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 Sanfame Polyester MaterialLtd has performed in the past in other metrics, you can view this free graph of Jiangsu Sanfame Polyester MaterialLtd's past earnings, revenue and cash flow.

So How Is Jiangsu Sanfame Polyester MaterialLtd's ROCE Trending?

In terms of Jiangsu Sanfame Polyester MaterialLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.1% from 5.8% five years ago. However it looks like Jiangsu Sanfame Polyester MaterialLtd 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 Sanfame Polyester MaterialLtd's current liabilities have increased over the last five years to 39% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Jiangsu Sanfame Polyester MaterialLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Jiangsu Sanfame Polyester MaterialLtd we've found 4 warning signs (3 shouldn't be ignored!) that you should be aware of before investing here.

While Jiangsu Sanfame Polyester MaterialLtd 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.