Jiangsu Hengxing New Material TechnologyLtd (SHSE:603276) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Jiangsu Hengxing New Material TechnologyLtd (SHSE:603276), it didn't seem to tick all of these boxes.

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 Jiangsu Hengxing New Material TechnologyLtd, this is the formula:

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

0.037 = CN¥65m ÷ (CN¥1.8b - CN¥53m) (Based on the trailing twelve months to June 2024).

Thus, Jiangsu Hengxing New Material TechnologyLtd has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

View our latest analysis for Jiangsu Hengxing New Material TechnologyLtd

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 Jiangsu Hengxing New Material TechnologyLtd's past further, check out this free graph covering Jiangsu Hengxing New Material TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Hengxing New Material TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Jiangsu Hengxing New Material TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 3.7%. However it looks like Jiangsu Hengxing New Material TechnologyLtd 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.

The Bottom Line

In summary, Jiangsu Hengxing New Material TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 2 warning signs for Jiangsu Hengxing New Material TechnologyLtd (1 is a bit unpleasant) you should be aware of.

While Jiangsu Hengxing New Material TechnologyLtd 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.