Jiangsu Chuanzhiboke Education Technology (SZSE:003032) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Jiangsu Chuanzhiboke Education Technology (SZSE:003032), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Jiangsu Chuanzhiboke Education Technology:

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

0.067 = CN¥105m ÷ (CN¥1.8b - CN¥235m) (Based on the trailing twelve months to September 2023).

So, Jiangsu Chuanzhiboke Education Technology has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

View our latest analysis for Jiangsu Chuanzhiboke Education Technology

Above you can see how the current ROCE for Jiangsu Chuanzhiboke Education Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu Chuanzhiboke Education Technology .

What Can We Tell From Jiangsu Chuanzhiboke Education Technology's ROCE Trend?

In terms of Jiangsu Chuanzhiboke Education Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Jiangsu Chuanzhiboke Education Technology has done well to pay down its current liabilities to 13% 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.

Our Take On Jiangsu Chuanzhiboke Education Technology's ROCE

We're a bit apprehensive about Jiangsu Chuanzhiboke Education Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 55% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Jiangsu Chuanzhiboke Education Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.