Zhejiang Jiemei Electronic And Technology (SZSE:002859) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Zhejiang Jiemei Electronic And Technology (SZSE:002859) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Zhejiang Jiemei Electronic And Technology, this is the formula:

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

0.064 = CN¥273m ÷ (CN¥5.2b - CN¥893m) (Based on the trailing twelve months to December 2023).

Thus, Zhejiang Jiemei Electronic And Technology has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Packaging industry average of 4.7%.

See our latest analysis for Zhejiang Jiemei Electronic And Technology

In the above chart we have measured Zhejiang Jiemei Electronic And Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Jiemei Electronic And Technology .

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 17% five years ago, while capital employed has grown 144%. Usually this isn't ideal, but given Zhejiang Jiemei Electronic And Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Zhejiang Jiemei Electronic And Technology's earnings and if they change as a result from the capital raise.

What We Can Learn From Zhejiang Jiemei Electronic And Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Jiemei Electronic And Technology is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 0.07% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 1 warning sign facing Zhejiang Jiemei Electronic And Technology that you might find interesting.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com