What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jiangsu Hanvo Safety Product (SZSE:300952) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jiangsu Hanvo Safety Product, this is the formula:

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

0.047 = CN¥94m ÷ (CN¥2.6b - CN¥611m) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Hanvo Safety Product has an ROCE of 4.7%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

In the above chart we have measured Jiangsu Hanvo Safety Product's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu Hanvo Safety Product .

What Can We Tell From Jiangsu Hanvo Safety Product's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 419%. That being said, Jiangsu Hanvo Safety Product raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Jiangsu Hanvo Safety Product probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On Jiangsu Hanvo Safety Product's ROCE

While returns have fallen for Jiangsu Hanvo Safety Product in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 16% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with Jiangsu Hanvo Safety Product (including 1 which shouldn't be ignored) .

While Jiangsu Hanvo Safety Product 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.