Why We Like The Returns At Jiangsu Zhengdan Chemical Industry (SZSE:300641)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Jiangsu Zhengdan Chemical Industry's (SZSE:300641) returns on capital, so let's have a look.

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. 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)

0.36 = CN¥940m ÷ (CN¥3.1b - CN¥447m) (Based on the trailing twelve months to September 2024).

So, Jiangsu Zhengdan Chemical Industry has an ROCE of 36%. In absolute terms that's a great return and it's even better than 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're interested in investigating Jiangsu Zhengdan Chemical Industry's past further, check out this free graph covering Jiangsu Zhengdan Chemical Industry's past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangsu Zhengdan Chemical Industry Tell Us?

Jiangsu Zhengdan Chemical Industry is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 36%. Basically the business is earning more per dollar of capital invested and in addition to that, 100% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

To sum it up, Jiangsu Zhengdan Chemical Industry has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 494% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.