Shareholders Would Enjoy A Repeat Of Jintai Energy Holdings' (HKG:2728) Recent Growth In Returns

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Jintai Energy Holdings' (HKG:2728) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Jintai Energy Holdings:

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

0.39 = HK$96m ÷ (HK$807m - HK$560m) (Based on the trailing twelve months to June 2022).

Thus, Jintai Energy Holdings has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 7.3% earned by companies in a similar industry.

See our latest analysis for Jintai Energy Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Jintai Energy Holdings, check out these free graphs here.

What Does the ROCE Trend For Jintai Energy Holdings Tell Us?

We're pretty happy with how the ROCE has been trending at Jintai Energy Holdings. We found that the returns on capital employed over the last five years have risen by 77%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Jintai Energy Holdings appears to been achieving more with less, since the business is using 42% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Another thing to note, Jintai Energy Holdings has a high ratio of current liabilities to total assets of 69%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Jintai Energy Holdings' ROCE

From what we've seen above, Jintai Energy Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 90% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know about the risks facing Jintai Energy Holdings, we've discovered 3 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.