There Are Reasons To Feel Uneasy About Jinan Shengquan Group Share Holding's (SHSE:605589) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Jinan Shengquan Group Share Holding (SHSE:605589), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Jinan Shengquan Group Share Holding is:

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

0.087 = CN¥977m ÷ (CN¥15b - CN¥3.5b) (Based on the trailing twelve months to March 2024).

So, Jinan Shengquan Group Share Holding has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 5.5%.

View our latest analysis for Jinan Shengquan Group Share Holding

In the above chart we have measured Jinan Shengquan Group Share Holding'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 Jinan Shengquan Group Share Holding for free.

What Can We Tell From Jinan Shengquan Group Share Holding's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago, while the business's capital employed increased by 108%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Jinan Shengquan Group Share Holding's earnings and if they change as a result from the capital raise.

What We Can Learn From Jinan Shengquan Group Share Holding's ROCE

To conclude, we've found that Jinan Shengquan Group Share Holding is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 1.6% over the last year, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 2 warning signs for Jinan Shengquan Group Share Holding you'll probably want to know about.

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.

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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.

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