Fujian Jinsen ForestryLtd (SZSE:002679) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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 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. The formula for this calculation on Fujian Jinsen ForestryLtd is:

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

0.031 = CN¥55m ÷ (CN¥2.0b - CN¥241m) (Based on the trailing twelve months to March 2024).

Therefore, Fujian Jinsen ForestryLtd has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Forestry industry average of 6.3%.

View our latest analysis for Fujian Jinsen ForestryLtd

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

So How Is Fujian Jinsen ForestryLtd's ROCE Trending?

In terms of Fujian Jinsen ForestryLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.7%, but since then they've fallen to 3.1%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Fujian Jinsen ForestryLtd has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

We're a bit apprehensive about Fujian Jinsen ForestryLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 49% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Fujian Jinsen ForestryLtd we've found 4 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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