Zhejiang Jiahua Energy Chemical IndustryLtd (SHSE:600273) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Zhejiang Jiahua Energy Chemical IndustryLtd (SHSE:600273) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Zhejiang Jiahua Energy Chemical IndustryLtd is:

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

0.11 = CN¥1.1b ÷ (CN¥12b - CN¥2.1b) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Jiahua Energy Chemical IndustryLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.

Check out our latest analysis for Zhejiang Jiahua Energy Chemical IndustryLtd

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

The Trend Of ROCE

In terms of Zhejiang Jiahua Energy Chemical IndustryLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 19% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Jiahua Energy Chemical IndustryLtd have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Zhejiang Jiahua Energy Chemical IndustryLtd, we've discovered 1 warning sign that you should be aware of.

While Zhejiang Jiahua Energy Chemical IndustryLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.