If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Jiang Su Suyan JingshenLtd (SHSE:603299) and its trend of ROCE, we really liked what we saw.
What Is 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. To calculate this metric for Jiang Su Suyan JingshenLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥838m ÷ (CN¥9.8b - CN¥4.3b) (Based on the trailing twelve months to June 2022).
Therefore, Jiang Su Suyan JingshenLtd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Chemicals industry.
View our latest analysis for Jiang Su Suyan JingshenLtd
SHSE:603299 Return on Capital Employed October 5th 2022Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiang Su Suyan JingshenLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Jiang Su Suyan JingshenLtd, check out these free graphs here.
What Does the ROCE Trend For Jiang Su Suyan JingshenLtd Tell Us?
We like the trends that we're seeing from Jiang Su Suyan JingshenLtd. The data shows that returns on capital have increased substantially over the last five years to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 139% more capital is being employed now too. So we're very much inspired by what we're seeing at Jiang Su Suyan JingshenLtd thanks to its ability to profitably reinvest capital.
On a side note, Jiang Su Suyan JingshenLtd's current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Jiang Su Suyan JingshenLtd's ROCE
In summary, it's great to see that Jiang Su Suyan JingshenLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 38% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Jiang Su Suyan JingshenLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Jiang Su Suyan JingshenLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.