What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shaanxi Jinye Science Technology and Education GroupLtd (SZSE:000812), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Shaanxi Jinye Science Technology and Education GroupLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = CN¥148m ÷ (CN¥4.4b - CN¥2.0b) (Based on the trailing twelve months to September 2023).
Thus, Shaanxi Jinye Science Technology and Education GroupLtd has an ROCE of 6.1%. On its own, that's a low figure but it's around the 5.4% average generated by the Commercial Services industry.
See our latest analysis for Shaanxi Jinye Science Technology and Education GroupLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shaanxi Jinye Science Technology and Education GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shaanxi Jinye Science Technology and Education GroupLtd, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Shaanxi Jinye Science Technology and Education GroupLtd in recent years. The company has employed 51% more capital in the last five years, and the returns on that capital have remained stable at 6.1%. 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.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 45% of total assets, this reported ROCE would probably be less than6.1% because total capital employed would be higher.The 6.1% ROCE could be even lower if current liabilities weren't 45% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.
What We Can Learn From Shaanxi Jinye Science Technology and Education GroupLtd's ROCE
In summary, Shaanxi Jinye Science Technology and Education GroupLtd has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to know some of the risks facing Shaanxi Jinye Science Technology and Education GroupLtd we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
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.