Jiangsu Xiehe ElectronicLtd (SHSE:605258) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Xiehe ElectronicLtd (SHSE:605258) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Jiangsu Xiehe ElectronicLtd is:

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

0.024 = CN¥30m ÷ (CN¥1.5b - CN¥248m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu Xiehe ElectronicLtd has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

Check out our latest analysis for Jiangsu Xiehe 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'd like to look at how Jiangsu Xiehe ElectronicLtd has performed in the past in other metrics, you can view this free graph of Jiangsu Xiehe ElectronicLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangsu Xiehe ElectronicLtd Tell Us?

In terms of Jiangsu Xiehe ElectronicLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 36% 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, Jiangsu Xiehe ElectronicLtd has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From Jiangsu Xiehe ElectronicLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Xiehe ElectronicLtd is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Jiangsu Xiehe ElectronicLtd does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com