There Are Reasons To Feel Uneasy About Zhejiang Jingxing Paper's (SZSE:002067) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Zhejiang Jingxing Paper (SZSE:002067), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Zhejiang Jingxing Paper:

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

0.015 = CN¥100m ÷ (CN¥8.4b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Jingxing Paper has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Packaging industry average of 5.2%.

View our latest analysis for Zhejiang Jingxing Paper

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Zhejiang Jingxing Paper has performed in the past in other metrics, you can view this free graph of Zhejiang Jingxing Paper's past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhejiang Jingxing Paper Tell Us?

When we looked at the ROCE trend at Zhejiang Jingxing Paper, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 4.6% five years ago. However it looks like Zhejiang Jingxing Paper might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhejiang Jingxing Paper has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Zhejiang Jingxing Paper's ROCE

In summary, Zhejiang Jingxing Paper is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 3 warning signs with Zhejiang Jingxing Paper (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.