Investors Could Be Concerned With Jiiangsu Times Textile TechnologyLTD's (SZSE:001234) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Jiiangsu Times Textile TechnologyLTD (SZSE:001234) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Jiiangsu Times Textile TechnologyLTD:

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

0.071 = CN¥64m ÷ (CN¥1.2b - CN¥281m) (Based on the trailing twelve months to September 2024).

So, Jiiangsu Times Textile TechnologyLTD has an ROCE of 7.1%. In absolute terms, that's a low return but it's around the Luxury industry average of 6.5%.

Check out our latest analysis for Jiiangsu Times Textile TechnologyLTD

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

What Can We Tell From Jiiangsu Times Textile TechnologyLTD's ROCE Trend?

On the surface, the trend of ROCE at Jiiangsu Times Textile TechnologyLTD doesn't inspire confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 7.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Jiiangsu Times Textile TechnologyLTD has done well to pay down its current liabilities to 24% 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.

The Bottom Line On Jiiangsu Times Textile TechnologyLTD's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiiangsu Times Textile TechnologyLTD is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 36% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 2 warning signs for Jiiangsu Times Textile TechnologyLTD that we think you should be aware of.

While Jiiangsu Times Textile TechnologyLTD 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.