What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Jiayuan Science and TechnologyLtd (SZSE:301117) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Jiayuan Science and TechnologyLtd:

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

0.036 = CN¥49m ÷ (CN¥1.4b - CN¥69m) (Based on the trailing twelve months to September 2023).

So, Jiayuan Science and TechnologyLtd has an ROCE of 3.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.4%.

Above you can see how the current ROCE for Jiayuan Science and TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiayuan Science and TechnologyLtd .

So How Is Jiayuan Science and TechnologyLtd's ROCE Trending?

On the surface, the trend of ROCE at Jiayuan Science and TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.6% from 27% 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'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.

On a side note, Jiayuan Science and TechnologyLtd has done well to pay down its current liabilities to 4.9% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Jiayuan Science and TechnologyLtd's ROCE

To conclude, we've found that Jiayuan Science and TechnologyLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 51% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Jiayuan Science and TechnologyLtd that we think you should be aware of.

While Jiayuan Science and TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.