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. 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 Allfavor Intelligent Circuits TechnologyLtd (SZSE:300964), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Jiangsu Allfavor Intelligent Circuits TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0045 = CN¥4.7m ÷ (CN¥1.3b - CN¥269m) (Based on the trailing twelve months to September 2023).
Therefore, Jiangsu Allfavor Intelligent Circuits TechnologyLtd has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Allfavor Intelligent Circuits TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Jiangsu Allfavor Intelligent Circuits TechnologyLtd's past further, check out this free graph covering Jiangsu Allfavor Intelligent Circuits TechnologyLtd's past earnings, revenue and cash flow.
What Can We Tell From Jiangsu Allfavor Intelligent Circuits TechnologyLtd's ROCE Trend?
In terms of Jiangsu Allfavor Intelligent Circuits TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 0.5%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Allfavor Intelligent Circuits TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 10% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we found 3 warning signs for Jiangsu Allfavor Intelligent Circuits TechnologyLtd (2 are concerning) you should be aware of.
While Jiangsu Allfavor Intelligent Circuits TechnologyLtd 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.