Jiangsu Zhengdan Chemical Industry (SZSE:300641) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Jiangsu Zhengdan Chemical Industry (SZSE:300641), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Jiangsu Zhengdan Chemical Industry is:

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

0.02 = CN¥38m ÷ (CN¥2.2b - CN¥331m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu Zhengdan Chemical Industry has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

Check out our latest analysis for Jiangsu Zhengdan Chemical Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Zhengdan Chemical Industry's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Zhengdan Chemical Industry.

How Are Returns Trending?

On the surface, the trend of ROCE at Jiangsu Zhengdan Chemical Industry doesn't inspire confidence. To be more specific, ROCE has fallen from 3.1% over the last five years. 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.

The Bottom Line On Jiangsu Zhengdan Chemical Industry's ROCE

We're a bit apprehensive about Jiangsu Zhengdan Chemical Industry because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 460% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Jiangsu Zhengdan Chemical Industry does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

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.

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