Jiangsu Dingsheng New Materials Ltd (SHSE:603876) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Jiangsu Dingsheng New Materials Ltd (SHSE:603876), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Jiangsu Dingsheng New Materials Ltd:

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

0.05 = CN¥465m ÷ (CN¥26b - CN¥17b) (Based on the trailing twelve months to June 2024).

Thus, Jiangsu Dingsheng New Materials Ltd has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.0%.

See 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're interested, you can view the analysts predictions in our free analyst report for Jiangsu Dingsheng New Materials Ltd .

What Does the ROCE Trend For Jiangsu Dingsheng New Materials Ltd 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 5.0% from 9.0% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. 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 65%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

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. In light of this, the stock has only gained 30% 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.

Jiangsu Dingsheng New Materials Ltd does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Jiangsu Dingsheng New Materials Ltd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.