Jiangsu Topfly New Materials (SZSE:001373) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 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 Topfly New Materials is:

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

0.017 = CN¥16m ÷ (CN¥1.1b - CN¥138m) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Topfly New Materials has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.6%.

View 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 The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jiangsu Topfly New Materials, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. However it looks like Jiangsu Topfly New Materials might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Jiangsu Topfly New Materials has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line On Jiangsu Topfly New Materials' ROCE

Bringing it all together, while we're somewhat encouraged by Jiangsu Topfly New Materials' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 6.4% in the last year to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Jiangsu Topfly New Materials does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.