Jiangsu Sidike New Materials Science & Technology's (SZSE:300806) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Jiangsu Sidike New Materials Science & Technology (SZSE:300806) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Jiangsu Sidike New Materials Science & Technology:

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

0.019 = CN¥96m ÷ (CN¥7.4b - CN¥2.4b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Sidike New Materials Science & Technology has an ROCE of 1.9%. 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

In the above chart we have measured Jiangsu Sidike New Materials Science & Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for 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. Around five years ago the returns on capital were 14%, but since then they've fallen to 1.9%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Jiangsu Sidike New Materials Science & Technology has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Sidike New Materials Science & Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 45% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Jiangsu Sidike New Materials Science & Technology does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.