Jiangsu Chinagreen Biological TechnologyLtd (SZSE:300970) Will Want To Turn Around Its Return Trends

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jiangsu Chinagreen Biological TechnologyLtd (SZSE:300970) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Jiangsu Chinagreen Biological TechnologyLtd, this is the formula:

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

0.039 = CN¥71m ÷ (CN¥2.1b - CN¥274m) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Chinagreen Biological TechnologyLtd has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.0%.

Check out our latest analysis for Jiangsu Chinagreen Biological TechnologyLtd

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 Chinagreen Biological TechnologyLtd.

What Can We Tell From Jiangsu Chinagreen Biological TechnologyLtd's ROCE Trend?

On the surface, the trend of ROCE at Jiangsu Chinagreen Biological TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.9% from 8.2% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Jiangsu Chinagreen Biological TechnologyLtd's ROCE

While returns have fallen for Jiangsu Chinagreen Biological TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 62% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Jiangsu Chinagreen Biological TechnologyLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

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.