Jiangsu Dingsheng New Materials Ltd (SHSE:603876) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Jiangsu Dingsheng New Materials Ltd (SHSE:603876), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.044 = CN¥372m ÷ (CN¥25b - CN¥17b) (Based on the trailing twelve months to September 2024).

So, Jiangsu Dingsheng New Materials Ltd has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.8%.

View our latest analysis for Jiangsu Dingsheng New Materials Ltd

In the above chart we have measured Jiangsu Dingsheng New Materials Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Dingsheng New Materials Ltd for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Jiangsu Dingsheng New Materials Ltd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.4% from 8.1% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 67%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.4%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Jiangsu Dingsheng New Materials Ltd's ROCE

While returns have fallen for Jiangsu Dingsheng New Materials Ltd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 5.6% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Jiangsu Dingsheng New Materials Ltd does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.