Jiangxi Yuean Advanced MaterialsLtd (SHSE:688786) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Jiangxi Yuean Advanced MaterialsLtd (SHSE:688786) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Jiangxi Yuean Advanced MaterialsLtd, this is the formula:

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

0.11 = CN¥82m ÷ (CN¥890m - CN¥116m) (Based on the trailing twelve months to September 2024).

Therefore, Jiangxi Yuean Advanced MaterialsLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 6.8% it's much better.

See our latest analysis for Jiangxi Yuean Advanced MaterialsLtd

Above you can see how the current ROCE for Jiangxi Yuean Advanced MaterialsLtd 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 Jiangxi Yuean Advanced MaterialsLtd for free.

How Are Returns Trending?

When we looked at the ROCE trend at Jiangxi Yuean Advanced MaterialsLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Jiangxi Yuean Advanced MaterialsLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 28% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 1 warning sign facing Jiangxi Yuean Advanced MaterialsLtd that you might find interesting.

While Jiangxi Yuean Advanced MaterialsLtd 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.