Investors Could Be Concerned With Jiangyin Jianghua Microelectronics Materials' (SHSE:603078) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Jiangyin Jianghua Microelectronics Materials (SHSE:603078), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Jiangyin Jianghua Microelectronics Materials, this is the formula:

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

0.034 = CN¥75m ÷ (CN¥2.7b - CN¥525m) (Based on the trailing twelve months to September 2024).

Thus, Jiangyin Jianghua Microelectronics Materials has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

View our latest analysis for Jiangyin Jianghua Microelectronics Materials

Above you can see how the current ROCE for Jiangyin Jianghua Microelectronics Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangyin Jianghua Microelectronics Materials .

So How Is Jiangyin Jianghua Microelectronics Materials' ROCE Trending?

On the surface, the trend of ROCE at Jiangyin Jianghua Microelectronics Materials doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.4% from 4.9% five years ago. However it looks like Jiangyin Jianghua Microelectronics Materials might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

In Conclusion...

In summary, Jiangyin Jianghua Microelectronics Materials is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in Jiangyin Jianghua Microelectronics Materials it's worth checking out our FREE intrinsic value approximation for 603078 to see if it's trading at an attractive price in other respects.

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.