If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Shenzhen Jiang&Associates Creative Design (SZSE:300668) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shenzhen Jiang&Associates Creative Design:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.064 = CN¥50m ÷ (CN¥1.1b - CN¥331m) (Based on the trailing twelve months to September 2023).

Therefore, Shenzhen Jiang&Associates Creative Design has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 6.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Jiang&Associates Creative Design's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shenzhen Jiang&Associates Creative Design, check out these free graphs here.

So How Is Shenzhen Jiang&Associates Creative Design's ROCE Trending?

When we looked at the ROCE trend at Shenzhen Jiang&Associates Creative Design, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 6.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 30%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Shenzhen Jiang&Associates Creative Design's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shenzhen Jiang&Associates Creative Design. In light of this, the stock has only gained 26% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching Shenzhen Jiang&Associates Creative Design, 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.