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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Jiang Su Yida ChemicalLtd (SZSE:300721) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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 Jiang Su Yida ChemicalLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = CN¥19m ÷ (CN¥2.6b - CN¥1.3b) (Based on the trailing twelve months to March 2024).
Thus, Jiang Su Yida ChemicalLtd has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiang Su Yida ChemicalLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiang Su Yida ChemicalLtd.
What Does the ROCE Trend For Jiang Su Yida ChemicalLtd Tell Us?
On the surface, the trend of ROCE at Jiang Su Yida ChemicalLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.5% from 3.4% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 50%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.5%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
What We Can Learn From Jiang Su Yida ChemicalLtd's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiang Su Yida ChemicalLtd. And the stock has followed suit returning a meaningful 55% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you want to continue researching Jiang Su Yida ChemicalLtd, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Jiang Su Yida ChemicalLtd 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.