Some Investors May Be Worried About Jiangsu Transimage Technology's (SZSE:002866) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Jiangsu Transimage Technology (SZSE:002866) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Transimage Technology, this is the formula:

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

0.015 = CN¥34m ÷ (CN¥4.2b - CN¥1.9b) (Based on the trailing twelve months to December 2023).

Therefore, Jiangsu Transimage Technology has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

View our latest analysis for Jiangsu Transimage Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Transimage Technology's 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 Transimage Technology.

What Does the ROCE Trend For Jiangsu Transimage Technology Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 9.5% five years ago, while capital employed has grown 123%. Usually this isn't ideal, but given Jiangsu Transimage Technology 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 Jiangsu Transimage Technology might not have received a full period of earnings contribution from it.

On a side note, Jiangsu Transimage Technology's current liabilities have increased over the last five years to 46% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.5%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Jiangsu Transimage Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Transimage Technology have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 36% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Like most companies, Jiangsu Transimage Technology does come with some risks, and we've found 2 warning signs that you should be aware of.

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.