Returns On Capital Signal Tricky Times Ahead For Jiangsu Innovative Ecological New Materials (HKG:2116)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 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?

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 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).

Therefore, 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 11%.

Check out our latest analysis for Jiangsu Innovative Ecological New Materials

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

How Are Returns Trending?

In terms of Jiangsu Innovative Ecological New Materials' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 7.2%. 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'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.

The Bottom Line On Jiangsu Innovative Ecological New Materials' ROCE

In summary, Jiangsu Innovative Ecological New Materials is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last three years. 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.

If you'd like to know more about Jiangsu Innovative Ecological New Materials, we've spotted 3 warning signs, and 1 of them can't be ignored.

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.
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