What are the early trends we should look for to identify a stock that could 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Jiangsu Sanfame Polyester MaterialLtd (SHSE:600370), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Jiangsu Sanfame Polyester MaterialLtd:

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

0.054 = CN¥520m ÷ (CN¥17b - CN¥7.1b) (Based on the trailing twelve months to June 2023).

Therefore, Jiangsu Sanfame Polyester MaterialLtd has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.

View our latest analysis for Jiangsu Sanfame Polyester MaterialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Sanfame Polyester MaterialLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Jiangsu Sanfame Polyester MaterialLtd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Jiangsu Sanfame Polyester MaterialLtd's historical ROCE trend, it doesn't exactly demand attention. The company has employed 534% more capital in the last five years, and the returns on that capital have remained stable at 5.4%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 42% of total assets, this reported ROCE would probably be less than5.4% because total capital employed would be higher.The 5.4% ROCE could be even lower if current liabilities weren't 42% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Jiangsu Sanfame Polyester MaterialLtd's ROCE

Long story short, while Jiangsu Sanfame Polyester MaterialLtd has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 18% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 2 warning signs we've spotted with Jiangsu Sanfame Polyester MaterialLtd (including 1 which is a bit unpleasant) .

While Jiangsu Sanfame Polyester MaterialLtd 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.