Be Wary Of Tongling Jieya Biologic Technology (SZSE:301108) And Its 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Tongling Jieya Biologic Technology (SZSE:301108), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Tongling Jieya Biologic Technology is:

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

0.033 = CN¥62m ÷ (CN¥2.1b - CN¥249m) (Based on the trailing twelve months to June 2024).

Thus, Tongling Jieya Biologic Technology has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 8.2%.

See our latest analysis for Tongling Jieya Biologic Technology

In the above chart we have measured Tongling Jieya Biologic Technology'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 Tongling Jieya Biologic Technology .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Tongling Jieya Biologic Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Tongling Jieya Biologic Technology has decreased its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Tongling Jieya Biologic Technology's ROCE

In summary, Tongling Jieya Biologic Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Tongling Jieya Biologic Technology, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Tongling Jieya Biologic Technology 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.