Capital Allocation Trends At Jiangxi Everbright Measurement And Control TechnologyLtd (SZSE:300906) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Jiangxi Everbright Measurement And Control TechnologyLtd (SZSE:300906) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Jiangxi Everbright Measurement And Control TechnologyLtd:

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

0.072 = CN¥64m ÷ (CN¥955m - CN¥66m) (Based on the trailing twelve months to September 2024).

Thus, Jiangxi Everbright Measurement And Control TechnologyLtd has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

Check out our latest analysis for Jiangxi Everbright Measurement And Control TechnologyLtd

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

How Are Returns Trending?

On the surface, the trend of ROCE at Jiangxi Everbright Measurement And Control TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 15% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Jiangxi Everbright Measurement And Control TechnologyLtd has done well to pay down its current liabilities to 6.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Jiangxi Everbright Measurement And Control TechnologyLtd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 23% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Jiangxi Everbright Measurement And Control TechnologyLtd (of which 1 is potentially serious!) that you should know about.

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.