If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think JiangSu Jinji IndustrialLtd (SZSE:300798) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. To calculate this metric for JiangSu Jinji IndustrialLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = CN¥21m ÷ (CN¥2.3b - CN¥389m) (Based on the trailing twelve months to September 2023).
Thus, JiangSu Jinji IndustrialLtd has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.
See our latest analysis for JiangSu Jinji IndustrialLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for JiangSu Jinji IndustrialLtd's ROCE against it's prior returns. If you're interested in investigating JiangSu Jinji IndustrialLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For JiangSu Jinji IndustrialLtd Tell Us?
When we looked at the ROCE trend at JiangSu Jinji IndustrialLtd, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 1.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for JiangSu Jinji IndustrialLtd have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 18% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
JiangSu Jinji IndustrialLtd does have some risks, we noticed 4 warning signs (and 3 which can't be ignored) we think you should know about.
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.
