What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Hainan Jinpan Smart Technology (SHSE:688676) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. To calculate this metric for Hainan Jinpan Smart Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CN¥432m ÷ (CN¥8.6b - CN¥3.9b) (Based on the trailing twelve months to September 2023).
Therefore, Hainan Jinpan Smart Technology has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.3%.
View our latest analysis for Hainan Jinpan Smart Technology
In the above chart we have measured Hainan Jinpan Smart Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
In terms of Hainan Jinpan Smart Technology's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 197% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a separate but related note, it's important to know that Hainan Jinpan Smart Technology has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Hainan Jinpan Smart Technology's ROCE
As we've seen above, Hainan Jinpan Smart Technology's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Hainan Jinpan Smart Technology has the makings of a multi-bagger.
One final note, you should learn about the 2 warning signs we've spotted with Hainan Jinpan Smart Technology (including 1 which makes us a bit uncomfortable) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.