Investors Could Be Concerned With Jiangsu Topfly New Materials' (SZSE:001373) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Topfly New Materials (SZSE:001373), it didn't seem to tick all of these boxes.

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. To calculate this metric for Jiangsu Topfly New Materials, this is the formula:

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

0.021 = CN¥20m ÷ (CN¥1.1b - CN¥182m) (Based on the trailing twelve months to June 2024).

So, Jiangsu Topfly New Materials has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

Check out our latest analysis for Jiangsu Topfly New Materials

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Topfly New Materials' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Topfly New Materials.

What Can We Tell From Jiangsu Topfly New Materials' ROCE Trend?

In terms of Jiangsu Topfly New Materials' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 2.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Jiangsu Topfly New Materials has decreased its current liabilities to 16% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Jiangsu Topfly New Materials' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Topfly New Materials is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 33% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Jiangsu Topfly New Materials does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.