Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Jiusheng Electric (SZSE:301082) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Jiusheng Electric:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥114m ÷ (CN¥2.5b - CN¥1.4b) (Based on the trailing twelve months to September 2022).
Therefore, Jiusheng Electric has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Electrical industry.
Check out our latest analysis for Jiusheng Electric
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiusheng Electric's ROCE against it's prior returns. If you'd like to look at how Jiusheng Electric has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Jiusheng Electric's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 26%, but since then they've fallen to 11%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Jiusheng Electric has decreased its current liabilities to 57% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Jiusheng Electric is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 9.0% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Jiusheng Electric (of which 2 are concerning!) that you should know about.
While Jiusheng Electric 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.