Jiangsu Eastern ShenghongLtd (SZSE:000301) Could Be Struggling To Allocate 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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Jiangsu Eastern ShenghongLtd (SZSE:000301) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Jiangsu Eastern ShenghongLtd, this is the formula:

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

0.041 = CN¥4.8b ÷ (CN¥187b - CN¥69b) (Based on the trailing twelve months to September 2023).

So, Jiangsu Eastern ShenghongLtd has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.9%.

Check out our latest analysis for Jiangsu Eastern ShenghongLtd

Above you can see how the current ROCE for Jiangsu Eastern ShenghongLtd 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 Jiangsu Eastern ShenghongLtd for free.

So How Is Jiangsu Eastern ShenghongLtd's ROCE Trending?

When we looked at the ROCE trend at Jiangsu Eastern ShenghongLtd, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 4.1%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Jiangsu Eastern ShenghongLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 83% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Jiangsu Eastern ShenghongLtd we've found 4 warning signs (1 is concerning!) that you should be aware of before investing here.

While Jiangsu Eastern ShenghongLtd 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.