What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Jiangyin Zhongnan Heavy IndustriesLtd (SZSE:002445) so let's look a bit deeper.

Understanding 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 Jiangyin Zhongnan Heavy IndustriesLtd is:

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

0.033 = CN¥79m ÷ (CN¥2.8b - CN¥456m) (Based on the trailing twelve months to September 2024).

Thus, Jiangyin Zhongnan Heavy IndustriesLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.8%.

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

What Can We Tell From Jiangyin Zhongnan Heavy IndustriesLtd's ROCE Trend?

Shareholders will be relieved that Jiangyin Zhongnan Heavy IndustriesLtd has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 3.3% on its capital. While returns have increased, the amount of capital employed by Jiangyin Zhongnan Heavy IndustriesLtd has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 16%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

To bring it all together, Jiangyin Zhongnan Heavy IndustriesLtd has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 89% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Jiangyin Zhongnan Heavy IndustriesLtd does have some risks though, and we've spotted 2 warning signs for Jiangyin Zhongnan Heavy IndustriesLtd that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.