These Return Metrics Don't Make Jiangsu Innovative Ecological New Materials (HKG:2116) Look Too Strong

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Jiangsu Innovative Ecological New Materials (HKG:2116), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.061 = CN¥14m ÷ (CN¥246m - CN¥18m) (Based on the trailing twelve months to June 2024).

So, Jiangsu Innovative Ecological New Materials has an ROCE of 6.1%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

See 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'd like to look at how Jiangsu Innovative Ecological New Materials has performed in the past in other metrics, you can view this free graph of Jiangsu Innovative Ecological New Materials' past earnings, revenue and cash flow.

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

We are a bit worried about the trend of returns on capital at Jiangsu Innovative Ecological New Materials. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Jiangsu Innovative Ecological New Materials to turn into a multi-bagger.

Our Take On Jiangsu Innovative Ecological New Materials' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 86% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Jiangsu Innovative Ecological New Materials, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

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.