Capital Allocation Trends At Jiangsu Dingsheng New Materials Ltd (SHSE:603876) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jiangsu Dingsheng New Materials Ltd (SHSE:603876) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Jiangsu Dingsheng New Materials Ltd is:

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

0.052 = CN¥507m ÷ (CN¥24b - CN¥14b) (Based on the trailing twelve months to March 2024).

Therefore, Jiangsu Dingsheng New Materials Ltd has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.9%.

Check out our latest analysis for Jiangsu Dingsheng New Materials Ltd

Above you can see how the current ROCE for Jiangsu Dingsheng New Materials Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Dingsheng New Materials Ltd for free.

What Can We Tell From Jiangsu Dingsheng New Materials Ltd's ROCE Trend?

In terms of Jiangsu Dingsheng New Materials Ltd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a separate but related note, it's important to know that Jiangsu Dingsheng New Materials Ltd has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Jiangsu Dingsheng New Materials Ltd's ROCE

Bringing it all together, while we're somewhat encouraged by Jiangsu Dingsheng New Materials Ltd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 40% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Jiangsu Dingsheng New Materials Ltd and understanding them should be part of your investment process.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.