Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 ZJMI Environmental Energy (SHSE:603071), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for ZJMI Environmental Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥1.2b ÷ (CN¥12b - CN¥5.6b) (Based on the trailing twelve months to June 2024).
Therefore, ZJMI Environmental Energy has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Oil and Gas industry.
In the above chart we have measured ZJMI Environmental Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ZJMI Environmental Energy for free.
What The Trend Of ROCE Can Tell Us
In terms of ZJMI Environmental Energy's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 19% from 32% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a related note, ZJMI Environmental Energy has decreased its current liabilities to 48% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.
The Bottom Line
In summary, we're somewhat concerned by ZJMI Environmental Energy's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 22% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we found 2 warning signs for ZJMI Environmental Energy (1 is a bit concerning) you should be aware of.
While ZJMI Environmental Energy 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.
