What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Nantong Jiangshan Agrochemical & ChemicalsLtd (SHSE:600389) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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 Nantong Jiangshan Agrochemical & ChemicalsLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = CN¥415m ÷ (CN¥6.4b - CN¥1.8b) (Based on the trailing twelve months to September 2023).
Thus, Nantong Jiangshan Agrochemical & ChemicalsLtd has an ROCE of 9.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.
Check out our latest analysis for Nantong Jiangshan Agrochemical & ChemicalsLtd
Above you can see how the current ROCE for Nantong Jiangshan Agrochemical & ChemicalsLtd 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 Nantong Jiangshan Agrochemical & ChemicalsLtd here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Nantong Jiangshan Agrochemical & ChemicalsLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.0% from 27% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.
In Conclusion...
We're a bit apprehensive about Nantong Jiangshan Agrochemical & ChemicalsLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 68% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
One more thing to note, we've identified 2 warning signs with Nantong Jiangshan Agrochemical & ChemicalsLtd and understanding these should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.