Investors Could Be Concerned With Jianzhi Education Technology Group's (NASDAQ:JZ) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Jianzhi Education Technology Group (NASDAQ:JZ), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Jianzhi Education Technology Group is:

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

0.05 = CN¥21m ÷ (CN¥696m - CN¥279m) (Based on the trailing twelve months to June 2022).

Thus, Jianzhi Education Technology Group has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 6.9%.

See our latest analysis for Jianzhi Education Technology Group

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 want to delve into the historical earnings, revenue and cash flow of Jianzhi Education Technology Group, check out these free graphs here.

What Does the ROCE Trend For Jianzhi Education Technology Group Tell Us?

When we looked at the ROCE trend at Jianzhi Education Technology Group, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 5.0% from 24% two years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Jianzhi Education Technology Group's current liabilities have increased over the last two years to 40% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.0%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Jianzhi Education Technology Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Jianzhi Education Technology Group have fallen, meanwhile the business is employing more capital than it was two years ago. We expect this has contributed to the stock plummeting 77% during the last year. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Jianzhi Education Technology Group, we've spotted 5 warning signs, and 1 of them is significant.

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. 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.