Returns On Capital Signal Tricky Times Ahead For Jiangxi Ganneng (SZSE:000899)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Jiangxi Ganneng (SZSE:000899), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Jiangxi Ganneng, this is the formula:

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

0.056 = CN¥805m ÷ (CN¥16b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Jiangxi Ganneng has an ROCE of 5.6%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

See our latest analysis for Jiangxi Ganneng

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

How Are Returns Trending?

In terms of Jiangxi Ganneng's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.1%, but since then they've fallen to 5.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Jiangxi Ganneng has decreased its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that Jiangxi Ganneng is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 90% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Jiangxi Ganneng does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

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.

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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.