Investors Could Be Concerned With Jiangsu Baichuan High-Tech New Materials' (SZSE:002455) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Jiangsu Baichuan High-Tech New Materials (SZSE:002455) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jiangsu Baichuan High-Tech New Materials:

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

0.0029 = CN¥18m ÷ (CN¥12b - CN¥5.5b) (Based on the trailing twelve months to September 2023).

So, Jiangsu Baichuan High-Tech New Materials has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.7%.

See our latest analysis for Jiangsu Baichuan High-Tech New Materials

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 Jiangsu Baichuan High-Tech New Materials has performed in the past in other metrics, you can view this free graph of Jiangsu Baichuan High-Tech New Materials' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Jiangsu Baichuan High-Tech New Materials' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.3% from 11% five years ago. However it looks like Jiangsu Baichuan High-Tech New Materials 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'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, Jiangsu Baichuan High-Tech New Materials' current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To conclude, we've found that Jiangsu Baichuan High-Tech New Materials is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Jiangsu Baichuan High-Tech New Materials, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Jiangsu Baichuan High-Tech New Materials 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.