Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Jianshe Industry Group (Yunnan)'s (SZSE:002265) returns on capital, so let's have a look.

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 Jianshe Industry Group (Yunnan):

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

0.043 = CN¥177m ÷ (CN¥8.3b - CN¥4.2b) (Based on the trailing twelve months to September 2024).

Therefore, Jianshe Industry Group (Yunnan) has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.3%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Jianshe Industry Group (Yunnan) has performed in the past in other metrics, you can view this free graph of Jianshe Industry Group (Yunnan)'s past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Jianshe Industry Group (Yunnan) is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Jianshe Industry Group (Yunnan) is utilizing 310% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 50% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

To the delight of most shareholders, Jianshe Industry Group (Yunnan) has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 24% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you'd like to know about the risks facing Jianshe Industry Group (Yunnan), we've discovered 1 warning sign that you should be aware of.

While Jianshe Industry Group (Yunnan) 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.