Zhejiang Jingxing Paper (SZSE:002067) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhejiang Jingxing Paper is:

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).

Thus, Zhejiang Jingxing Paper has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 5.2%.

See our latest analysis for Zhejiang Jingxing Paper

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

How Are Returns Trending?

When we looked at the ROCE trend at Zhejiang Jingxing Paper, we didn't gain much confidence. Around five years ago the returns on capital were 4.6%, but since then they've fallen to 1.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

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. Unsurprisingly, the stock has only gained 31% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Zhejiang Jingxing Paper (including 2 which shouldn't be ignored) .

While Zhejiang Jingxing Paper 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.