Here's What's Concerning About Jilin OLED Material Tech's (SHSE:688378) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Jilin OLED Material Tech (SHSE:688378) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Jilin OLED Material Tech:

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

0.065 = CN¥124m ÷ (CN¥2.1b - CN¥179m) (Based on the trailing twelve months to December 2023).

Thus, Jilin OLED Material Tech has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 5.4% generated by the Electronic industry, it's much better.

View our latest analysis for Jilin OLED Material Tech

Above you can see how the current ROCE for Jilin OLED Material Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jilin OLED Material Tech .

So How Is Jilin OLED Material Tech's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 58% five years ago, while capital employed has grown 1,009%. Usually this isn't ideal, but given Jilin OLED Material Tech conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Jilin OLED Material Tech might not have received a full period of earnings contribution from it.

On a related note, Jilin OLED Material Tech has decreased its current liabilities to 8.6% of total assets. Considering it used to be 64%, that's a huge drop in that ratio and it would explain the decline in ROCE. 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 Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jilin OLED Material Tech. Furthermore the stock has climbed 34% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 3 warning signs for Jilin OLED Material Tech (1 shouldn't be ignored) you should be aware of.

While Jilin OLED Material Tech 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.