Jilin Chemical Fibre StockLtd (SZSE:000420) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 briefly looking over the numbers, we don't think Jilin Chemical Fibre StockLtd (SZSE:000420) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Jilin Chemical Fibre StockLtd, this is the formula:

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

0.055 = CN¥323m ÷ (CN¥11b - CN¥4.8b) (Based on the trailing twelve months to December 2023).

So, Jilin Chemical Fibre StockLtd has an ROCE of 5.5%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

See our latest analysis for Jilin Chemical Fibre StockLtd

Above you can see how the current ROCE for Jilin Chemical Fibre StockLtd 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 Jilin Chemical Fibre StockLtd for free.

What Does the ROCE Trend For Jilin Chemical Fibre StockLtd Tell Us?

In terms of Jilin Chemical Fibre StockLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.5% from 9.2% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Jilin Chemical Fibre StockLtd has done well to pay down its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Jilin Chemical Fibre StockLtd's ROCE

To conclude, we've found that Jilin Chemical Fibre StockLtd is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing Jilin Chemical Fibre StockLtd we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Jilin Chemical Fibre StockLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com