Jiangsu HHCK Advanced MaterialsLtd (SHSE:688535) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Jiangsu HHCK Advanced MaterialsLtd (SHSE:688535), it didn't seem to tick all of these boxes.

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. To calculate this metric for Jiangsu HHCK Advanced MaterialsLtd, this is the formula:

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

0.019 = CN¥20m ÷ (CN¥1.2b - CN¥140m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu HHCK Advanced MaterialsLtd has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 3.9%.

Check out our latest analysis for Jiangsu HHCK Advanced MaterialsLtd

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're interested in investigating Jiangsu HHCK Advanced MaterialsLtd's past further, check out this free graph covering Jiangsu HHCK Advanced MaterialsLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Jiangsu HHCK Advanced MaterialsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.9% from 3.5% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Jiangsu HHCK Advanced MaterialsLtd has decreased its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Key Takeaway

To conclude, we've found that Jiangsu HHCK Advanced MaterialsLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 21% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Jiangsu HHCK Advanced MaterialsLtd, we've discovered 1 warning sign that you should be aware of.

While Jiangsu HHCK Advanced MaterialsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.