Some Investors May Be Worried About Jiangsu ChengXing Phosph-Chemicals' (SHSE:600078) 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Jiangsu ChengXing Phosph-Chemicals (SHSE:600078) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jiangsu ChengXing Phosph-Chemicals, this is the formula:

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

0.009 = CN¥34m ÷ (CN¥5.3b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

Thus, Jiangsu ChengXing Phosph-Chemicals has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Jiangsu ChengXing Phosph-Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu ChengXing Phosph-Chemicals' ROCE against it's prior returns. If you'd like to look at how Jiangsu ChengXing Phosph-Chemicals has performed in the past in other metrics, you can view this free graph of Jiangsu ChengXing Phosph-Chemicals' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Jiangsu ChengXing Phosph-Chemicals doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.9% from 14% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Jiangsu ChengXing Phosph-Chemicals has decreased its current liabilities to 28% 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.

What We Can Learn From Jiangsu ChengXing Phosph-Chemicals' ROCE

Bringing it all together, while we're somewhat encouraged by Jiangsu ChengXing Phosph-Chemicals' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 27% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Jiangsu ChengXing Phosph-Chemicals that you might find interesting.

While Jiangsu ChengXing Phosph-Chemicals 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.