There Are Reasons To Feel Uneasy About Jinsanjiang (Zhaoqing) Silicon Material's (SZSE:301059) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Jinsanjiang (Zhaoqing) Silicon Material (SZSE:301059), 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 Jinsanjiang (Zhaoqing) Silicon Material is:

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

0.079 = CN¥46m ÷ (CN¥671m - CN¥86m) (Based on the trailing twelve months to September 2023).

So, Jinsanjiang (Zhaoqing) Silicon Material has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.9% generated by the Chemicals industry, it's much better.

View our latest analysis for Jinsanjiang (Zhaoqing) Silicon Material

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jinsanjiang (Zhaoqing) Silicon Material'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 Jinsanjiang (Zhaoqing) Silicon Material.

What Can We Tell From Jinsanjiang (Zhaoqing) Silicon Material's ROCE Trend?

When we looked at the ROCE trend at Jinsanjiang (Zhaoqing) Silicon Material, we didn't gain much confidence. To be more specific, ROCE has fallen from 45% over the last five years. 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 related note, Jinsanjiang (Zhaoqing) Silicon Material has decreased its current liabilities to 13% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Jinsanjiang (Zhaoqing) Silicon Material is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 48% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Jinsanjiang (Zhaoqing) Silicon Material, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.