Returns On Capital At Ningbo Jianan ElectronicsLtd (SZSE:300880) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Ningbo Jianan ElectronicsLtd (SZSE:300880) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ningbo Jianan ElectronicsLtd is:

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

0.17 = CN¥170m ÷ (CN¥1.4b - CN¥466m) (Based on the trailing twelve months to March 2024).

Thus, Ningbo Jianan ElectronicsLtd has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Electronic industry.

View our latest analysis for Ningbo Jianan ElectronicsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Jianan ElectronicsLtd's ROCE against it's prior returns. If you're interested in investigating Ningbo Jianan ElectronicsLtd's past further, check out this free graph covering Ningbo Jianan ElectronicsLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Ningbo Jianan ElectronicsLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 29% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ningbo Jianan ElectronicsLtd has done well to pay down its current liabilities to 32% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ningbo Jianan ElectronicsLtd. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Ningbo Jianan ElectronicsLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Ningbo Jianan ElectronicsLtd 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.

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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.

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