Jiangsu Hongtian TechnologyLtd (SHSE:603800) Is Experiencing Growth In Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Jiangsu Hongtian TechnologyLtd's (SHSE:603800) returns on capital, so let's have a look.

Understanding 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 Hongtian TechnologyLtd, this is the formula:

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

0.16 = CN¥244m ÷ (CN¥3.7b - CN¥2.2b) (Based on the trailing twelve months to March 2024).

So, Jiangsu Hongtian TechnologyLtd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 6.5% it's much better.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Jiangsu Hongtian TechnologyLtd .

What The Trend Of ROCE Can Tell Us

Jiangsu Hongtian TechnologyLtd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. So we're very much inspired by what we're seeing at Jiangsu Hongtian TechnologyLtd thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 59% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

To sum it up, Jiangsu Hongtian TechnologyLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 3 warning signs with Jiangsu Hongtian TechnologyLtd and understanding these should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com