Chengdu Jiafaantai Education TechnologyLtd (SZSE:300559) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Chengdu Jiafaantai Education TechnologyLtd (SZSE:300559) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Chengdu Jiafaantai Education TechnologyLtd:

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

0.10 = CN¥128m ÷ (CN¥1.4b - CN¥192m) (Based on the trailing twelve months to March 2024).

Therefore, Chengdu Jiafaantai Education TechnologyLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 4.0% generated by the Communications industry.

View our latest analysis for Chengdu Jiafaantai Education TechnologyLtd

Above you can see how the current ROCE for Chengdu Jiafaantai Education TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chengdu Jiafaantai Education TechnologyLtd .

How Are Returns Trending?

When we looked at the ROCE trend at Chengdu Jiafaantai Education TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 17% five years ago. 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.

The Bottom Line On Chengdu Jiafaantai Education TechnologyLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Chengdu Jiafaantai Education TechnologyLtd. However, despite the promising trends, the stock has fallen 27% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Chengdu Jiafaantai Education TechnologyLtd that we think you should be aware of.

While Chengdu Jiafaantai Education TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

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