Here's What's Concerning About Chengdu Jiafaantai Education TechnologyLtd's (SZSE:300559) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Chengdu Jiafaantai Education TechnologyLtd (SZSE:300559) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Chengdu Jiafaantai Education TechnologyLtd, this is the formula:

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

0.10 = CN¥123m ÷ (CN¥1.4b - CN¥208m) (Based on the trailing twelve months to December 2023).

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 4.6% generated by the Communications industry.

Check out our latest analysis for Chengdu Jiafaantai Education TechnologyLtd

In the above chart we have measured Chengdu Jiafaantai Education TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Chengdu Jiafaantai Education TechnologyLtd .

So How Is Chengdu Jiafaantai Education TechnologyLtd's ROCE 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 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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 Chengdu Jiafaantai Education TechnologyLtd. These growth trends haven't led to growth returns though, since the stock has fallen 16% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 2 warning signs facing Chengdu Jiafaantai Education TechnologyLtd that you might find interesting.

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.