There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Jiangsu Yangnong Chemical (SHSE:600486), it didn't seem to tick all of these boxes.
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 Jiangsu Yangnong Chemical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥1.8b ÷ (CN¥16b - CN¥5.5b) (Based on the trailing twelve months to September 2023).
Therefore, Jiangsu Yangnong Chemical has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.
See our latest analysis for Jiangsu Yangnong Chemical
Above you can see how the current ROCE for Jiangsu Yangnong Chemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Jiangsu Yangnong Chemical's ROCE Trend?
When we looked at the ROCE trend at Jiangsu Yangnong Chemical, we didn't gain much confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 18%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Jiangsu Yangnong Chemical's ROCE
We're a bit apprehensive about Jiangsu Yangnong Chemical because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 121% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you want to continue researching Jiangsu Yangnong Chemical, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.