If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Jiangsu Ruitai New Energy Materials (SZSE:301238), 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. The formula for this calculation on Jiangsu Ruitai New Energy Materials is:

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 6.4%.

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 Jiangsu Ruitai New Energy Materials' past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Ruitai New Energy Materials' ROCE Trend?

When we looked at the ROCE trend at Jiangsu Ruitai New Energy Materials, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 6.6%. 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.

On a related note, Jiangsu Ruitai New Energy Materials has decreased its current liabilities to 24% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, we're somewhat concerned by Jiangsu Ruitai New Energy Materials' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 41% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, 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.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.