Investors Met With Slowing Returns on Capital At Jiangsu Hongtian TechnologyLtd (SHSE:603800)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. With that in mind, the ROCE of Jiangsu Hongtian TechnologyLtd (SHSE:603800) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Jiangsu Hongtian TechnologyLtd, this is the formula:

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

0.13 = CN¥185m ÷ (CN¥3.3b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu Hongtian TechnologyLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Energy Services industry.

View our latest analysis for Jiangsu Hongtian TechnologyLtd

Above you can see how the current ROCE for Jiangsu Hongtian TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Hongtian TechnologyLtd for free.

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 39% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Jiangsu Hongtian TechnologyLtd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 57% of total assets, this reported ROCE would probably be less than13% because total capital employed would be higher.The 13% ROCE could be even lower if current liabilities weren't 57% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Jiangsu Hongtian TechnologyLtd's ROCE

In the end, Jiangsu Hongtian TechnologyLtd has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 194% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Jiangsu Hongtian TechnologyLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Jiangsu Hongtian TechnologyLtd 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.