Slowing Rates Of Return At Jiangyin Zhongnan Heavy IndustriesLtd (SZSE:002445) Leave Little Room For Excitement

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Jiangyin Zhongnan Heavy IndustriesLtd (SZSE:002445), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jiangyin Zhongnan Heavy IndustriesLtd:

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

0.027 = CN¥62m ÷ (CN¥2.6b - CN¥320m) (Based on the trailing twelve months to September 2023).

Therefore, Jiangyin Zhongnan Heavy IndustriesLtd has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.0%.

See our latest analysis for Jiangyin Zhongnan Heavy IndustriesLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Jiangyin Zhongnan Heavy IndustriesLtd has performed in the past in other metrics, you can view this free graph of Jiangyin Zhongnan Heavy IndustriesLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, Jiangyin Zhongnan Heavy IndustriesLtd's ROCE has remained relatively flat while the business is using 52% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

On a side note, Jiangyin Zhongnan Heavy IndustriesLtd has done well to reduce current liabilities to 12% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Jiangyin Zhongnan Heavy IndustriesLtd's ROCE

It's a shame to see that Jiangyin Zhongnan Heavy IndustriesLtd is effectively shrinking in terms of its capital base. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. Therefore based on the analysis done in this article, we don't think Jiangyin Zhongnan Heavy IndustriesLtd has the makings of a multi-bagger.

Jiangyin Zhongnan Heavy IndustriesLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002445 on our platform quite valuable.

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.