Jiangsu Innovative Ecological New Materials (HKG:2116) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Jiangsu Innovative Ecological New Materials (HKG:2116) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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)

0.071 = CN¥22m ÷ (CN¥347m - CN¥34m) (Based on the trailing twelve months to December 2022).

So, Jiangsu Innovative Ecological New Materials has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 10%.

View 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 Does the ROCE Trend For Jiangsu Innovative Ecological New Materials Tell Us?

When we looked at the ROCE trend at Jiangsu Innovative Ecological New Materials, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.1% from 31% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Jiangsu Innovative Ecological New Materials has done well to pay down its current liabilities to 9.7% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Jiangsu Innovative Ecological New Materials' ROCE

While returns have fallen for Jiangsu Innovative Ecological New Materials in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 30% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Jiangsu Innovative Ecological New Materials (of which 1 is concerning!) that you should know about.

While Jiangsu Innovative Ecological New Materials may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.