If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Jiangsu Sidike New Materials Science & Technology (SZSE:300806), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Jiangsu Sidike New Materials Science & Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = CN¥66m ÷ (CN¥7.2b - CN¥2.3b) (Based on the trailing twelve months to September 2023).
So, Jiangsu Sidike New Materials Science & Technology has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.
See our latest analysis for Jiangsu Sidike New Materials Science & Technology
Above you can see how the current ROCE for Jiangsu Sidike New Materials Science & Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Sidike New Materials Science & Technology here for free.
What Does the ROCE Trend For Jiangsu Sidike New Materials Science & Technology Tell Us?
The trend of ROCE doesn't look fantastic because it's fallen from 10% five years ago, while the business's capital employed increased by 434%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Jiangsu Sidike New Materials Science & Technology's earnings and if they change as a result from the capital raise.
On a side note, Jiangsu Sidike New Materials Science & Technology has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Key Takeaway
We're a bit apprehensive about Jiangsu Sidike New Materials Science & Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 27% return to shareholders over the last three years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Jiangsu Sidike New Materials Science & Technology does have some risks, we noticed 5 warning signs (and 2 which shouldn't be ignored) we think you should know about.
While Jiangsu Sidike New Materials Science & Technology 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.