Inner Mongolia Junzheng Energy & Chemical GroupLtd (SHSE:601216) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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 Inner Mongolia Junzheng Energy & Chemical GroupLtd (SHSE:601216) 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 Inner Mongolia Junzheng Energy & Chemical GroupLtd:

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

0.092 = CN¥2.8b ÷ (CN¥41b - CN¥10b) (Based on the trailing twelve months to September 2023).

Therefore, Inner Mongolia Junzheng Energy & Chemical GroupLtd has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.8%.

Check out our latest analysis for Inner Mongolia Junzheng Energy & Chemical GroupLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Inner Mongolia Junzheng Energy & Chemical GroupLtd's past further, check out this free graph covering Inner Mongolia Junzheng Energy & Chemical GroupLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Inner Mongolia Junzheng Energy & Chemical GroupLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% 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.

Our Take On Inner Mongolia Junzheng Energy & Chemical GroupLtd's ROCE

In summary, Inner Mongolia Junzheng Energy & Chemical GroupLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 21% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Inner Mongolia Junzheng Energy & Chemical GroupLtd does have some risks though, and we've spotted 1 warning sign for Inner Mongolia Junzheng Energy & Chemical GroupLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.