Returns On Capital Are Showing Encouraging Signs At Jiangsu Rutong Petro-Machinery (SHSE:603036)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Jiangsu Rutong Petro-Machinery's (SHSE:603036) returns on capital, so let's have a look.

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. To calculate this metric for Jiangsu Rutong Petro-Machinery, this is the formula:

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

0.075 = CN¥98m ÷ (CN¥1.5b - CN¥159m) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Rutong Petro-Machinery has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 5.2% generated by the Energy Services industry, it's much better.

See our latest analysis for Jiangsu Rutong Petro-Machinery

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Rutong Petro-Machinery.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.5%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Jiangsu Rutong Petro-Machinery's ROCE

All in all, it's terrific to see that Jiangsu Rutong Petro-Machinery is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 67% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Jiangsu Rutong Petro-Machinery can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Jiangsu Rutong Petro-Machinery you'll probably want to know about.

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.