Jiangsu Xukuang Energy's (SHSE:600925) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Jiangsu Xukuang Energy (SHSE:600925) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Jiangsu Xukuang Energy is:

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

0.098 = CN¥2.8b ÷ (CN¥39b - CN¥9.9b) (Based on the trailing twelve months to March 2024).

So, Jiangsu Xukuang Energy has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 11%.

Check out our latest analysis for Jiangsu Xukuang Energy

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

What Does the ROCE Trend For Jiangsu Xukuang Energy Tell Us?

In terms of Jiangsu Xukuang Energy's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.8% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Jiangsu Xukuang Energy has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Key Takeaway

In summary, we're somewhat concerned by Jiangsu Xukuang Energy's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Jiangsu Xukuang Energy does have some risks though, and we've spotted 1 warning sign for Jiangsu Xukuang Energy that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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