What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Hubei Jianghan New Materials (SHSE:603281), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Hubei Jianghan New Materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥651m ÷ (CN¥5.2b - CN¥279m) (Based on the trailing twelve months to March 2024).
Therefore, Hubei Jianghan New Materials has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Chemicals industry.
Above you can see how the current ROCE for Hubei Jianghan New Materials 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 Hubei Jianghan New Materials .
What Does the ROCE Trend For Hubei Jianghan New Materials Tell Us?
When we looked at the ROCE trend at Hubei Jianghan New Materials, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 28% five years ago. 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 side note, Hubei Jianghan New Materials has done well to pay down its current liabilities to 5.3% of total assets. That could partly explain why the ROCE has dropped. 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 Hubei Jianghan New Materials' ROCE
In summary, we're somewhat concerned by Hubei Jianghan New Materials' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 25% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Hubei Jianghan New Materials does have some risks though, and we've spotted 1 warning sign for Hubei Jianghan New Materials that you might be interested in.
While Hubei Jianghan New Materials 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.
