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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Jinlongyu Group (SZSE:002882) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Jinlongyu Group is:

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

0.084 = CN¥181m ÷ (CN¥3.6b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

Thus, Jinlongyu Group has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 5.8% generated by the Electrical industry, it's much better.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jinlongyu Group.

What Does the ROCE Trend For Jinlongyu Group Tell Us?

When we looked at the ROCE trend at Jinlongyu Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.4% from 21% five years ago. However it looks like Jinlongyu Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Jinlongyu Group's ROCE

To conclude, we've found that Jinlongyu Group is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 53% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Jinlongyu Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Jinlongyu Group 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.