Be Wary Of Fujian Jinsen ForestryLtd (SZSE:002679) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Fujian Jinsen ForestryLtd (SZSE:002679), it didn't seem to tick all of these boxes.

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

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 Fujian Jinsen ForestryLtd, this is the formula:

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

0.014 = CN¥24m ÷ (CN¥2.1b - CN¥284m) (Based on the trailing twelve months to September 2023).

Thus, Fujian Jinsen ForestryLtd has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Forestry industry average of 4.5%.

View our latest analysis for Fujian Jinsen ForestryLtd

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 Fujian Jinsen ForestryLtd has performed in the past in other metrics, you can view this free graph of Fujian Jinsen ForestryLtd's past earnings, revenue and cash flow.

What Can We Tell From Fujian Jinsen ForestryLtd's ROCE Trend?

On the surface, the trend of ROCE at Fujian Jinsen ForestryLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.4% from 6.8% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Fujian Jinsen ForestryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Fujian Jinsen ForestryLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 69% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we found 3 warning signs for Fujian Jinsen ForestryLtd (2 are a bit concerning) 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.