JinkoSolar Holding (NYSE:JKS) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at JinkoSolar Holding (NYSE:JKS) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on JinkoSolar Holding is:

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

0.014 = CN¥610m ÷ (CN¥111b - CN¥67b) (Based on the trailing twelve months to September 2022).

Thus, JinkoSolar Holding has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 15%.

See our latest analysis for JinkoSolar Holding

In the above chart we have measured JinkoSolar Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for JinkoSolar Holding.

So How Is JinkoSolar Holding's ROCE Trending?

When we looked at the ROCE trend at JinkoSolar Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.8% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, JinkoSolar Holding has done well to pay down its current liabilities to 60% 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. Keep in mind 60% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From JinkoSolar Holding's ROCE

While returns have fallen for JinkoSolar Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 194% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 3 warning signs we've spotted with JinkoSolar Holding (including 1 which doesn't sit too well with us) .

While JinkoSolar Holding 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.