If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Jiangyin Haida Rubber And Plastic (SZSE:300320), it didn't seem to tick all of these boxes.
Understanding 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. To calculate this metric for Jiangyin Haida Rubber And Plastic, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = CN¥175m ÷ (CN¥3.4b - CN¥1.1b) (Based on the trailing twelve months to September 2023).
Thus, Jiangyin Haida Rubber And Plastic has an ROCE of 7.8%. 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.
See our latest analysis for Jiangyin Haida Rubber And Plastic
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangyin Haida Rubber And Plastic's ROCE against it's prior returns. If you'd like to look at how Jiangyin Haida Rubber And Plastic has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Jiangyin Haida Rubber And Plastic's ROCE Trending?
On the surface, the trend of ROCE at Jiangyin Haida Rubber And Plastic doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Jiangyin Haida Rubber And Plastic might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Jiangyin Haida Rubber And Plastic's ROCE
In summary, Jiangyin Haida Rubber And Plastic is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 42% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we've found 1 warning sign for Jiangyin Haida Rubber And Plastic that we think you should be aware of.
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.