What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Jiangxi Yuean Advanced MaterialsLtd (SHSE:688786) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Jiangxi Yuean Advanced MaterialsLtd is:

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

0.11 = CN¥79m ÷ (CN¥868m - CN¥123m) (Based on the trailing twelve months to June 2024).

Therefore, Jiangxi Yuean Advanced MaterialsLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Metals and Mining industry.

In the above chart we have measured Jiangxi Yuean Advanced MaterialsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Jiangxi Yuean Advanced MaterialsLtd .

What Can We Tell From Jiangxi Yuean Advanced MaterialsLtd's ROCE Trend?

When we looked at the ROCE trend at Jiangxi Yuean Advanced MaterialsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 25% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Jiangxi Yuean Advanced MaterialsLtd has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From Jiangxi Yuean Advanced MaterialsLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Jiangxi Yuean Advanced MaterialsLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Jiangxi Yuean Advanced MaterialsLtd, we've spotted 2 warning signs, and 1 of them is a bit concerning.

While Jiangxi Yuean Advanced MaterialsLtd 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.