Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Jiangsu Tongxingbao Intelligent Transportation Technology (SZSE:301339) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Jiangsu Tongxingbao Intelligent Transportation Technology:

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

0.051 = CN¥134m ÷ (CN¥5.3b - CN¥2.7b) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Tongxingbao Intelligent Transportation Technology has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.

View our latest analysis for Jiangsu Tongxingbao Intelligent Transportation Technology

Above you can see how the current ROCE for Jiangsu Tongxingbao Intelligent Transportation Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Jiangsu Tongxingbao Intelligent Transportation Technology Tell Us?

On the surface, the trend of ROCE at Jiangsu Tongxingbao Intelligent Transportation Technology doesn't inspire confidence. Around five years ago the returns on capital were 56%, but since then they've fallen to 5.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Jiangsu Tongxingbao Intelligent Transportation Technology has decreased its current liabilities to 50% 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. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Jiangsu Tongxingbao Intelligent Transportation Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Tongxingbao Intelligent Transportation Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 29% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Jiangsu Tongxingbao Intelligent Transportation Technology that we think you should be aware of.

While Jiangsu Tongxingbao Intelligent Transportation Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.