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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Jiangsu Longda Superalloy (SHSE:688231) looks quite promising in regards to its trends of return on capital.

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 Longda Superalloy, this is the formula:

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

0.019 = CN¥55m ÷ (CN¥3.4b - CN¥445m) (Based on the trailing twelve months to December 2023).

Thus, Jiangsu Longda Superalloy has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.3%.

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 Jiangsu Longda Superalloy has performed in the past in other metrics, you can view this free graph of Jiangsu Longda Superalloy's past earnings, revenue and cash flow.

How Are Returns Trending?

Jiangsu Longda Superalloy has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 1.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Jiangsu Longda Superalloy is utilizing 767% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Jiangsu Longda Superalloy has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Jiangsu Longda Superalloy has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

Overall, Jiangsu Longda Superalloy gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 55% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Jiangsu Longda Superalloy does come with some risks, and we've found 2 warning signs that you should be aware of.

While Jiangsu Longda Superalloy 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.