Guangzhou Jet Bio-Filtration (SHSE:688026) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Guangzhou Jet Bio-Filtration (SHSE:688026), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Guangzhou Jet Bio-Filtration:

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

0.04 = CN¥60m ÷ (CN¥1.6b - CN¥95m) (Based on the trailing twelve months to March 2024).

Therefore, Guangzhou Jet Bio-Filtration has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.3%.

Check out our latest analysis for Guangzhou Jet Bio-Filtration

In the above chart we have measured Guangzhou Jet Bio-Filtration's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangzhou Jet Bio-Filtration .

So How Is Guangzhou Jet Bio-Filtration's ROCE Trending?

When we looked at the ROCE trend at Guangzhou Jet Bio-Filtration, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.0% from 17% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Guangzhou Jet Bio-Filtration is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Moreover, since the stock has crumbled 81% over the last three years, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Guangzhou Jet Bio-Filtration does have some risks though, and we've spotted 2 warning signs for Guangzhou Jet Bio-Filtration that you might be interested in.

While Guangzhou Jet Bio-Filtration isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.