There Are Reasons To Feel Uneasy About Nantong Jiangshan Agrochemical & ChemicalsLtd's (SHSE:600389) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Nantong Jiangshan Agrochemical & ChemicalsLtd (SHSE:600389) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Nantong Jiangshan Agrochemical & ChemicalsLtd:

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

0.035 = CN¥149m ÷ (CN¥6.6b - CN¥2.4b) (Based on the trailing twelve months to March 2024).

Thus, Nantong Jiangshan Agrochemical & ChemicalsLtd has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

View our latest analysis for Nantong Jiangshan Agrochemical & ChemicalsLtd

Above you can see how the current ROCE for Nantong Jiangshan Agrochemical & ChemicalsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nantong Jiangshan Agrochemical & ChemicalsLtd for free.

What The Trend Of ROCE Can Tell Us

In terms of Nantong Jiangshan Agrochemical & ChemicalsLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 3.5%. 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.

What We Can Learn From Nantong Jiangshan Agrochemical & ChemicalsLtd's ROCE

In summary, we're somewhat concerned by Nantong Jiangshan Agrochemical & ChemicalsLtd's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 14% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing, we've spotted 2 warning signs facing Nantong Jiangshan Agrochemical & ChemicalsLtd that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

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