Capital Allocation Trends At Zhejiang Jianye Chemical (SHSE:603948) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Zhejiang Jianye Chemical (SHSE:603948), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Zhejiang Jianye Chemical is:

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

0.17 = CN¥356m ÷ (CN¥2.7b - CN¥577m) (Based on the trailing twelve months to December 2023).

So, Zhejiang Jianye Chemical has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.0% it's much better.

View our latest analysis for Zhejiang Jianye Chemical

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 Zhejiang Jianye Chemical's past further, check out this free graph covering Zhejiang Jianye Chemical's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Jianye Chemical's ROCE Trend?

In terms of Zhejiang Jianye Chemical's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 17%. However it looks like Zhejiang Jianye Chemical 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Zhejiang Jianye Chemical's ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang Jianye Chemical's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 22% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 1 warning sign facing Zhejiang Jianye Chemical that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.