If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Jiangsu Ruitai New Energy Materials (SZSE:301238), 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 Jiangsu Ruitai New Energy Materials:

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

0.024 = CN¥197m ÷ (CN¥9.9b - CN¥1.7b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Ruitai New Energy Materials has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Ruitai New Energy Materials' ROCE against it's prior returns. If you'd like to look at how Jiangsu Ruitai New Energy Materials has performed in the past in other metrics, you can view this free graph of Jiangsu Ruitai New Energy Materials' past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Ruitai New Energy Materials' ROCE Trend?

In terms of Jiangsu Ruitai New Energy Materials' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. 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, Jiangsu Ruitai New Energy Materials has decreased its current liabilities to 17% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Ruitai New Energy Materials have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 7.2% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Jiangsu Ruitai New Energy Materials does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While Jiangsu Ruitai New Energy 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.