If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Jinsanjiang (Zhaoqing) Silicon Material (SZSE:301059) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for Jinsanjiang (Zhaoqing) Silicon Material:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = CN¥39m ÷ (CN¥689m - CN¥90m) (Based on the trailing twelve months to March 2024).
Thus, Jinsanjiang (Zhaoqing) Silicon Material has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Chemicals industry average of 5.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jinsanjiang (Zhaoqing) Silicon Material's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jinsanjiang (Zhaoqing) Silicon Material.
How Are Returns Trending?
In terms of Jinsanjiang (Zhaoqing) Silicon Material's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 38%, but since then they've fallen to 6.5%. However it looks like Jinsanjiang (Zhaoqing) Silicon Material 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Jinsanjiang (Zhaoqing) Silicon Material has decreased its current liabilities to 13% 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.
Our Take On Jinsanjiang (Zhaoqing) Silicon Material's ROCE
To conclude, we've found that Jinsanjiang (Zhaoqing) Silicon Material is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you want to know some of the risks facing Jinsanjiang (Zhaoqing) Silicon Material we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
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.