What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Jiangsu Hengshun Vinegar-IndustryLtd (SHSE:600305), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Jiangsu Hengshun Vinegar-IndustryLtd:

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

0.024 = CN¥84m ÷ (CN¥3.9b - CN¥410m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu Hengshun Vinegar-IndustryLtd has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.

Above you can see how the current ROCE for Jiangsu Hengshun Vinegar-IndustryLtd 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 Jiangsu Hengshun Vinegar-IndustryLtd .

What Can We Tell From Jiangsu Hengshun Vinegar-IndustryLtd's ROCE Trend?

We weren't thrilled with the trend because Jiangsu Hengshun Vinegar-IndustryLtd's ROCE has reduced by 81% over the last five years, while the business employed 54% more capital. Usually this isn't ideal, but given Jiangsu Hengshun Vinegar-IndustryLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Jiangsu Hengshun Vinegar-IndustryLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Key Takeaway

In summary, we're somewhat concerned by Jiangsu Hengshun Vinegar-IndustryLtd's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 33% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Jiangsu Hengshun Vinegar-IndustryLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com