Jiangsu Tongxingbao Intelligent Transportation Technology (SZSE:301339) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Jiangsu Tongxingbao Intelligent Transportation Technology (SZSE:301339) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Jiangsu Tongxingbao Intelligent Transportation Technology:

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

0.05 = CN¥139m ÷ (CN¥5.6b - CN¥2.8b) (Based on the trailing twelve months to March 2024).

Therefore, Jiangsu Tongxingbao Intelligent Transportation Technology has an ROCE of 5.0%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

Check out our latest analysis for Jiangsu Tongxingbao Intelligent Transportation Technology

Above you can see how the current ROCE for Jiangsu Tongxingbao Intelligent Transportation Technology 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 Jiangsu Tongxingbao Intelligent Transportation Technology .

The Trend Of ROCE

On the surface, the trend of ROCE at Jiangsu Tongxingbao Intelligent Transportation Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.0% from 53% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Jiangsu Tongxingbao Intelligent Transportation Technology has decreased its current liabilities to 51% 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. Keep in mind 51% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Jiangsu Tongxingbao Intelligent Transportation Technology's ROCE

While returns have fallen for Jiangsu Tongxingbao Intelligent Transportation Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 13% over the last year. 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 Jiangsu Tongxingbao Intelligent Transportation Technology 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.

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