Jiangsu United Water TechnologyLtd (SHSE:603291) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Jiangsu United Water TechnologyLtd (SHSE:603291) 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)?

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 Jiangsu United Water TechnologyLtd, this is the formula:

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

0.079 = CN¥230m ÷ (CN¥3.7b - CN¥748m) (Based on the trailing twelve months to March 2024).

Therefore, Jiangsu United Water TechnologyLtd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.4% generated by the Water Utilities industry, it's much better.

View our latest analysis for Jiangsu United Water TechnologyLtd

Above you can see how the current ROCE for Jiangsu United Water 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 Jiangsu United Water TechnologyLtd .

What The Trend Of ROCE Can Tell Us

In terms of Jiangsu United Water TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 10%, but since then they've fallen to 7.9%. However it looks like Jiangsu United Water TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Jiangsu United Water TechnologyLtd's ROCE

To conclude, we've found that Jiangsu United Water TechnologyLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 31% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Jiangsu United Water TechnologyLtd has the makings of a multi-bagger.

Like most companies, Jiangsu United Water TechnologyLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

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