What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at Jiangsu ZongyiLTD (SHSE:600770) and its trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Jiangsu ZongyiLTD, this is the formula:

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

0.0018 = CN¥9.1m ÷ (CN¥5.5b - CN¥533m) (Based on the trailing twelve months to March 2023).

Thus, Jiangsu ZongyiLTD has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.7%.

Check out our latest analysis for Jiangsu ZongyiLTD

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Jiangsu ZongyiLTD has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Jiangsu ZongyiLTD's ROCE Trend?

We're delighted to see that Jiangsu ZongyiLTD is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.2% on its capital. While returns have increased, the amount of capital employed by Jiangsu ZongyiLTD has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

One more thing to note, Jiangsu ZongyiLTD has decreased current liabilities to 9.8% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

In summary, we're delighted to see that Jiangsu ZongyiLTD has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 1 warning sign with Jiangsu ZongyiLTD and understanding this should be part of your investment process.

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.