Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Jinan Shengquan Group Share Holding (SHSE:605589) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Jinan Shengquan Group Share Holding:

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

0.086 = CN¥975m ÷ (CN¥15b - CN¥3.2b) (Based on the trailing twelve months to June 2024).

So, Jinan Shengquan Group Share Holding has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.

In the above chart we have measured Jinan Shengquan Group Share 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 analyst report for Jinan Shengquan Group Share Holding .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Jinan Shengquan Group Share Holding's ROCE has reduced by 22% over the last five years, while the business employed 105% more capital. Usually this isn't ideal, but given Jinan Shengquan Group Share Holding conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Jinan Shengquan Group Share Holding might not have received a full period of earnings contribution from it.

The Bottom Line On Jinan Shengquan Group Share Holding's ROCE

To conclude, we've found that Jinan Shengquan Group Share Holding is reinvesting in the business, but returns have been falling. Since the stock has declined 50% over the last three years, 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 Jinan Shengquan Group Share Holding that we think you should be aware of.

While Jinan Shengquan Group Share 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.