Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Although, when we looked at JinXianDai Information IndustryLtd (SZSE:300830), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for JinXianDai Information IndustryLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = CN¥24m ÷ (CN¥1.3b - CN¥105m) (Based on the trailing twelve months to September 2023).
Therefore, JinXianDai Information IndustryLtd has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Software industry average of 2.6%.
Check out our latest analysis for JinXianDai Information IndustryLtd
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 JinXianDai Information IndustryLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of JinXianDai Information IndustryLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.0% from 13% five years ago. However it looks like JinXianDai Information IndustryLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
To conclude, we've found that JinXianDai Information IndustryLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 36% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
JinXianDai Information IndustryLtd does have some risks, we noticed 3 warning signs (and 2 which are significant) 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.
