There Are Reasons To Feel Uneasy About Inner Mongolia Junzheng Energy & Chemical GroupLtd's (SHSE:601216) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Inner Mongolia Junzheng Energy & Chemical GroupLtd (SHSE:601216), it didn't seem to tick all of these boxes.

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Understanding 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. To calculate this metric for Inner Mongolia Junzheng Energy & Chemical GroupLtd, this is the formula:

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).

Therefore, Inner Mongolia Junzheng Energy & Chemical GroupLtd has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.6%.

View 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'd like to look at how Inner Mongolia Junzheng Energy & Chemical GroupLtd has performed in the past in other metrics, you can view this free graph of Inner Mongolia Junzheng Energy & Chemical GroupLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Inner Mongolia Junzheng Energy & Chemical GroupLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.8%, but since then they've fallen to 7.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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

In summary, despite lower returns in the short term, we're encouraged to see that Inner Mongolia Junzheng Energy & Chemical GroupLtd is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 220% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 3 warning signs we've spotted with Inner Mongolia Junzheng Energy & Chemical GroupLtd (including 2 which shouldn't be ignored) .

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.