Inner Mongolia Junzheng Energy & Chemical GroupLtd (SHSE:601216) 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Inner Mongolia Junzheng Energy & Chemical GroupLtd (SHSE:601216) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Inner Mongolia Junzheng Energy & Chemical GroupLtd is:

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

0.078 = CN¥2.6b ÷ (CN¥43b - CN¥9.9b) (Based on the trailing twelve months to September 2024).

Thus, Inner Mongolia Junzheng Energy & Chemical GroupLtd has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inner Mongolia Junzheng Energy & Chemical GroupLtd's ROCE against it's prior returns. 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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Inner Mongolia Junzheng Energy & Chemical GroupLtd, we didn't gain much confidence. Around five years ago the returns on capital were 9.8%, but since then they've fallen to 7.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

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

While returns have fallen for Inner Mongolia Junzheng Energy & Chemical GroupLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 200% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 3 warning signs we've spotted with Inner Mongolia Junzheng Energy & Chemical GroupLtd (including 2 which don't sit too well with us) .

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.