Here's What's Concerning About Guangzhou Jet Bio-Filtration's (SHSE:688026) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Guangzhou Jet Bio-Filtration (SHSE:688026), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Guangzhou Jet Bio-Filtration is:

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

0.064 = CN¥99m ÷ (CN¥1.6b - CN¥84m) (Based on the trailing twelve months to September 2024).

So, Guangzhou Jet Bio-Filtration has an ROCE of 6.4%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

See 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're interested, you can view the analysts predictions in our free analyst report for Guangzhou Jet Bio-Filtration .

How Are Returns 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 6.4% from 17% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Guangzhou Jet Bio-Filtration's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Guangzhou Jet Bio-Filtration. Despite these promising trends, the stock has collapsed 78% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

On a separate note, we've found 1 warning sign for Guangzhou Jet Bio-Filtration you'll probably want to know about.

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.