What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So, when we ran our eye over Zhejiang Jianye Chemical's (SHSE:603948) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Zhejiang Jianye Chemical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥308m ÷ (CN¥2.5b - CN¥470m) (Based on the trailing twelve months to June 2024).
Thus, Zhejiang Jianye Chemical has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Chemicals industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Jianye Chemical's ROCE against it's prior returns. If you'd like to look at how Zhejiang Jianye Chemical has performed in the past in other metrics, you can view this free graph of Zhejiang Jianye Chemical's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 139% more capital in the last five years, and the returns on that capital have remained stable at 15%. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line
To sum it up, Zhejiang Jianye Chemical has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last three years the stock has declined 40%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
If you'd like to know about the risks facing Zhejiang Jianye Chemical, we've discovered 1 warning sign that you should be aware of.
While Zhejiang Jianye Chemical 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.
