If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Nantong Jiangshan Agrochemical & ChemicalsLtd (SHSE:600389) and its ROCE trend, we weren't exactly thrilled.
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 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).
Therefore, Nantong Jiangshan Agrochemical & ChemicalsLtd has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 6.0%.
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 to see what analysts are forecasting going forward, you should check out our free analyst report for Nantong Jiangshan Agrochemical & ChemicalsLtd .
So How Is Nantong Jiangshan Agrochemical & ChemicalsLtd's ROCE Trending?
In terms of Nantong Jiangshan Agrochemical & ChemicalsLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 27% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
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. Investors must expect better things on the horizon though because the stock has risen 5.0% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing, we've spotted 2 warning signs facing Nantong Jiangshan Agrochemical & ChemicalsLtd that you might find interesting.
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.