Here's What To Make Of Jiangsu Innovative Ecological New Materials' (HKG:2116) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Jiangsu Innovative Ecological New Materials (HKG:2116), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Innovative Ecological New Materials, this is the formula:

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

0.11 = CN¥30m ÷ (CN¥302m - CN¥21m) (Based on the trailing twelve months to June 2020).

Thus, Jiangsu Innovative Ecological New Materials has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

Check out our latest analysis for Jiangsu Innovative Ecological New Materials

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Innovative Ecological New Materials' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Jiangsu Innovative Ecological New Materials, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Jiangsu Innovative Ecological New Materials' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 24% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Jiangsu Innovative Ecological New Materials has decreased its current liabilities to 6.9% of total assets. That could partly explain why the ROCE has dropped. 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 Jiangsu Innovative Ecological New Materials is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last year has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we found 3 warning signs for Jiangsu Innovative Ecological New Materials (1 shouldn't be ignored) 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. 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.
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