Guangzhou Jointas Chemical (SZSE:002909) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Guangzhou Jointas Chemical (SZSE:002909) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guangzhou Jointas Chemical is:

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

0.027 = CN¥30m ÷ (CN¥2.3b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

So, Guangzhou Jointas Chemical has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.4%.

View our latest analysis for Guangzhou Jointas Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangzhou Jointas Chemical's ROCE against it's prior returns. If you'd like to look at how Guangzhou Jointas Chemical has performed in the past in other metrics, you can view this free graph of Guangzhou Jointas Chemical's past earnings, revenue and cash flow.

What Does the ROCE Trend For Guangzhou Jointas Chemical Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 14% five years ago, while capital employed has grown 107%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Guangzhou Jointas Chemical probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a separate but related note, it's important to know that Guangzhou Jointas Chemical has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. 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 Key Takeaway

In summary, Guangzhou Jointas Chemical is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Guangzhou Jointas Chemical does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are concerning...

While Guangzhou Jointas Chemical 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.