The Returns On Capital At Jiangsu Xukuang Energy (SHSE:600925) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Jiangsu Xukuang Energy (SHSE:600925) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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

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

0.096 = CN¥2.7b ÷ (CN¥39b - CN¥11b) (Based on the trailing twelve months to June 2024).

So, Jiangsu Xukuang Energy has an ROCE of 9.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jiangsu Xukuang Energy, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.6% from 16% five years ago. 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 related note, Jiangsu Xukuang Energy has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. 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. In spite of that, the stock has delivered a 0.6% return to shareholders who held over the last year. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Jiangsu Xukuang Energy could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 600925 on our platform quite valuable.

While Jiangsu Xukuang Energy 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.