Jiangsu Lettall ElectronicLtd (SHSE:603629) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Jiangsu Lettall ElectronicLtd (SHSE:603629) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Jiangsu Lettall ElectronicLtd is:

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

0.037 = CN¥108m ÷ (CN¥6.0b - CN¥3.1b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Lettall ElectronicLtd has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

Check out our latest analysis for Jiangsu Lettall ElectronicLtd

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 Lettall ElectronicLtd's past further, check out this free graph covering Jiangsu Lettall ElectronicLtd's past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Lettall ElectronicLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 10% five years ago, while the business's capital employed increased by 201%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Jiangsu Lettall ElectronicLtd's earnings and if they change as a result from the capital raise.

On a separate but related note, it's important to know that Jiangsu Lettall ElectronicLtd has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Jiangsu Lettall ElectronicLtd's ROCE

We're a bit apprehensive about Jiangsu Lettall ElectronicLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 76% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Jiangsu Lettall ElectronicLtd does have some risks though, and we've spotted 1 warning sign for Jiangsu Lettall ElectronicLtd that you might be interested in.

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.