What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Jiangsu Ruitai New Energy Materials (SZSE:301238) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Ruitai New Energy Materials, this is the formula:

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

0.066 = CN¥540m ÷ (CN¥11b - CN¥2.6b) (Based on the trailing twelve months to September 2023).

So, Jiangsu Ruitai New Energy Materials has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Electrical industry average of 6.3%.

See our latest analysis for Jiangsu Ruitai New Energy Materials

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Ruitai New Energy Materials' ROCE against it's prior returns. If you'd like to look at how Jiangsu Ruitai New Energy Materials has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Jiangsu Ruitai New Energy Materials' ROCE Trending?

On the surface, the trend of ROCE at Jiangsu Ruitai New Energy Materials doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Jiangsu Ruitai New Energy Materials has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Ruitai New Energy Materials have fallen, meanwhile the business is employing more capital than it was four years ago. It should come as no surprise then that the stock has fallen 31% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Jiangsu Ruitai New Energy Materials that you might find interesting.

While Jiangsu Ruitai New Energy Materials 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.