Jiangsu Evergreen New Material Technology (SHSE:603125) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Jiangsu Evergreen New Material Technology (SHSE:603125), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jiangsu Evergreen New Material Technology, this is the formula:

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

0.088 = CN¥203m ÷ (CN¥2.4b - CN¥135m) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Evergreen New Material Technology has an ROCE of 8.8%. 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 Jiangsu Evergreen New Material Technology

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Evergreen New Material Technology.

How Are Returns Trending?

On the surface, the trend of ROCE at Jiangsu Evergreen New Material Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 26% 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Jiangsu Evergreen New Material Technology has done well to pay down its current liabilities to 5.6% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Jiangsu Evergreen New Material Technology's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 15% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Jiangsu Evergreen New Material Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While Jiangsu Evergreen New Material Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.