Be Wary Of JiangSu Jinji IndustrialLtd (SZSE:300798) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating JiangSu Jinji IndustrialLtd (SZSE:300798), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for JiangSu Jinji IndustrialLtd:

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

0.011 = CN¥21m ÷ (CN¥2.3b - CN¥389m) (Based on the trailing twelve months to September 2023).

Therefore, JiangSu Jinji IndustrialLtd has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.8%.

View our latest analysis for JiangSu Jinji IndustrialLtd

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

What Does the ROCE Trend For JiangSu Jinji IndustrialLtd Tell Us?

On the surface, the trend of ROCE at JiangSu Jinji IndustrialLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.1% from 14% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On JiangSu Jinji IndustrialLtd's ROCE

In summary, we're somewhat concerned by JiangSu Jinji IndustrialLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 19% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about JiangSu Jinji IndustrialLtd, we've spotted 4 warning signs, and 2 of them can't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.