Returns On Capital At Jointo Energy Investment Hebei (SZSE:000600) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Jointo Energy Investment Hebei (SZSE:000600), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Jointo Energy Investment Hebei is:

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

0.027 = CN¥808m ÷ (CN¥40b - CN¥10b) (Based on the trailing twelve months to September 2024).

Thus, Jointo Energy Investment Hebei has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.6%.

See our latest analysis for Jointo Energy Investment Hebei

Above you can see how the current ROCE for Jointo Energy Investment Hebei compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jointo Energy Investment Hebei for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Jointo Energy Investment Hebei doesn't inspire confidence. Around five years ago the returns on capital were 6.7%, but since then they've fallen to 2.7%. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Jointo Energy Investment Hebei's ROCE

While returns have fallen for Jointo Energy Investment Hebei in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 34% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Jointo Energy Investment Hebei does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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

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.