What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. And in light of that, the trends we're seeing at Nantong Jiangshan Agrochemical & ChemicalsLtd's (SHSE:600389) look very promising so lets take a look.
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. The formula for this calculation on Nantong Jiangshan Agrochemical & ChemicalsLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.47 = CN¥2.0b ÷ (CN¥7.0b - CN¥2.9b) (Based on the trailing twelve months to June 2022).
Therefore, Nantong Jiangshan Agrochemical & ChemicalsLtd has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 9.8%.
Check out our latest analysis for Nantong Jiangshan Agrochemical & ChemicalsLtd
SHSE:600389 Return on Capital Employed September 4th 2022In the above chart we have measured Nantong Jiangshan Agrochemical & ChemicalsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nantong Jiangshan Agrochemical & ChemicalsLtd.
What Can We Tell From Nantong Jiangshan Agrochemical & ChemicalsLtd's ROCE Trend?
Investors would be pleased with what's happening at Nantong Jiangshan Agrochemical & ChemicalsLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 47%. Basically the business is earning more per dollar of capital invested and in addition to that, 168% more capital is being employed now too. So we're very much inspired by what we're seeing at Nantong Jiangshan Agrochemical & ChemicalsLtd thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 41%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Nantong Jiangshan Agrochemical & ChemicalsLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
What We Can Learn From Nantong Jiangshan Agrochemical & ChemicalsLtd's ROCE
To sum it up, Nantong Jiangshan Agrochemical & ChemicalsLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 189% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know about the risks facing Nantong Jiangshan Agrochemical & ChemicalsLtd, we've discovered 2 warning signs that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.