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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Zhejiang Jiahua Energy Chemical IndustryLtd (SHSE:600273) 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)

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 Zhejiang Jiahua Energy Chemical IndustryLtd:

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

0.12 = CN¥1.2b ÷ (CN¥13b - CN¥2.3b) (Based on the trailing twelve months to June 2024).

So, Zhejiang Jiahua Energy Chemical IndustryLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.

View 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Jiahua Energy Chemical IndustryLtd.

How Are Returns Trending?

When we looked at the ROCE trend at Zhejiang Jiahua Energy Chemical IndustryLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. 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.

The Key Takeaway

To conclude, we've found that Zhejiang Jiahua Energy Chemical IndustryLtd is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 0.8% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 1 warning sign for Zhejiang Jiahua Energy Chemical IndustryLtd you'll probably want to know about.

While Zhejiang Jiahua Energy Chemical IndustryLtd 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.