Jilin Joinature PolymerLtd (SHSE:688716) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Jilin Joinature PolymerLtd (SHSE:688716) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jilin Joinature PolymerLtd:

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

0.032 = CN¥39m ÷ (CN¥1.3b - CN¥70m) (Based on the trailing twelve months to September 2024).

So, Jilin Joinature PolymerLtd has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

Check out our latest analysis for Jilin Joinature PolymerLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jilin Joinature PolymerLtd's ROCE against it's prior returns. If you're interested in investigating Jilin Joinature PolymerLtd's past further, check out this free graph covering Jilin Joinature PolymerLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Jilin Joinature PolymerLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.2% from 5.7% 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.

The Bottom Line On Jilin Joinature PolymerLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jilin Joinature PolymerLtd. And the stock has followed suit returning a meaningful 89% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Jilin Joinature PolymerLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Jilin Joinature PolymerLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.