Investors Met With Slowing Returns on Capital At Jiangxi Selon Industrial (SZSE:002748)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Jiangxi Selon Industrial (SZSE:002748), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Jiangxi Selon Industrial:

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

0.047 = CN¥70m ÷ (CN¥2.0b - CN¥536m) (Based on the trailing twelve months to September 2023).

So, Jiangxi Selon Industrial has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.9%.

Check out our latest analysis for Jiangxi Selon Industrial

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

So How Is Jiangxi Selon Industrial's ROCE Trending?

The returns on capital haven't changed much for Jiangxi Selon Industrial in recent years. The company has consistently earned 4.7% for the last five years, and the capital employed within the business has risen 26% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Jiangxi Selon Industrial's ROCE

Long story short, while Jiangxi Selon Industrial has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 2 warning signs for Jiangxi Selon Industrial that we think you should be aware of.

While Jiangxi Selon Industrial may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.