Jiangsu Innovative Ecological New Materials (HKG:2116) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Jiangsu Innovative Ecological New Materials:

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

0.072 = CN¥21m ÷ (CN¥306m - CN¥20m) (Based on the trailing twelve months to December 2020).

So, Jiangsu Innovative Ecological New Materials has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.5%.

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're interested in investigating Jiangsu Innovative Ecological New Materials' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Jiangsu Innovative Ecological New Materials' ROCE Trending?

On the surface, the trend of ROCE at Jiangsu Innovative Ecological New Materials doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 23% five years ago. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Jiangsu Innovative Ecological New Materials' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 52% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Jiangsu Innovative Ecological New Materials has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Jiangsu Innovative Ecological New Materials (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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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