If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Jiangsu Sidike New Materials Science & Technology (SZSE:300806), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Sidike New Materials Science & Technology, this is the formula:

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

0.014 = CN¥66m ÷ (CN¥7.2b - CN¥2.3b) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Sidike New Materials Science & Technology has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.0%.

Above you can see how the current ROCE for Jiangsu Sidike New Materials Science & Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Sidike New Materials Science & Technology .

What Can We Tell From Jiangsu Sidike New Materials Science & Technology's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 10% five years ago, while the business's capital employed increased by 434%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Jiangsu Sidike New Materials Science & Technology might not have received a full period of earnings contribution from it.

On a side note, Jiangsu Sidike New Materials Science & Technology has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Jiangsu Sidike New Materials Science & Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Sidike New Materials Science & Technology have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 40% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Jiangsu Sidike New Materials Science & Technology does have some risks, we noticed 4 warning signs (and 2 which are significant) we think you should know about.

While Jiangsu Sidike New Materials Science & Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.