Returns On Capital Are Showing Encouraging Signs At JiaoZuo WanFang Aluminum Manufacturing (SZSE:000612)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in JiaoZuo WanFang Aluminum Manufacturing's (SZSE:000612) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for JiaoZuo WanFang Aluminum Manufacturing, this is the formula:

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

0.12 = CN¥742m ÷ (CN¥7.7b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

So, JiaoZuo WanFang Aluminum Manufacturing has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Metals and Mining industry.

Check out our latest analysis for JiaoZuo WanFang Aluminum Manufacturing

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

What Can We Tell From JiaoZuo WanFang Aluminum Manufacturing's ROCE Trend?

JiaoZuo WanFang Aluminum Manufacturing has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. In addition to that, JiaoZuo WanFang Aluminum Manufacturing is employing 30% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 20%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From JiaoZuo WanFang Aluminum Manufacturing's ROCE

To the delight of most shareholders, JiaoZuo WanFang Aluminum Manufacturing has now broken into profitability. And with a respectable 70% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 1 warning sign for JiaoZuo WanFang Aluminum Manufacturing that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.