Jiangsu Sidike New Materials Science & Technology (SZSE:300806) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Jiangsu Sidike New Materials Science & Technology (SZSE:300806) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Jiangsu Sidike New Materials Science & Technology is:

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

0.012 = CN¥57m ÷ (CN¥7.3b - CN¥2.5b) (Based on the trailing twelve months to June 2024).

Therefore, Jiangsu Sidike New Materials Science & Technology has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Jiangsu Sidike New Materials Science & Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Sidike New Materials Science & Technology'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 Sidike New Materials Science & Technology.

How Are Returns Trending?

When we looked at the ROCE trend at Jiangsu Sidike New Materials Science & Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.2% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Jiangsu Sidike New Materials Science & Technology has done well to pay down its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Jiangsu Sidike New Materials Science & Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangsu Sidike New Materials Science & Technology. These growth trends haven't led to growth returns though, since the stock has fallen 52% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 5 warning signs for Jiangsu Sidike New Materials Science & Technology (3 make us uncomfortable) you should be aware of.

While Jiangsu Sidike New Materials Science & Technology 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.