Be Wary Of Jinan Shengquan Group Share Holding (SHSE:605589) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Jinan Shengquan Group Share Holding (SHSE:605589) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Jinan Shengquan Group Share Holding:

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

0.086 = CN¥975m ÷ (CN¥15b - CN¥3.2b) (Based on the trailing twelve months to June 2024).

Therefore, Jinan Shengquan Group Share Holding has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

View our latest analysis for Jinan Shengquan Group Share Holding

Above you can see how the current ROCE for Jinan Shengquan Group Share Holding 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 Jinan Shengquan Group Share Holding for free.

The Trend Of ROCE

We weren't thrilled with the trend because Jinan Shengquan Group Share Holding's ROCE has reduced by 22% over the last five years, while the business employed 105% more capital. That being said, Jinan Shengquan Group Share Holding raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Jinan Shengquan Group Share Holding might not have received a full period of earnings contribution from it.

Our Take On Jinan Shengquan Group Share Holding's ROCE

Bringing it all together, while we're somewhat encouraged by Jinan Shengquan Group Share Holding's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Jinan Shengquan Group Share Holding does have some risks though, and we've spotted 2 warning signs for Jinan Shengquan Group Share Holding that you might be interested in.

While Jinan Shengquan Group Share Holding 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.