Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Jilin Jlu Communication Design InstituteLtd (SZSE:300597) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Jilin Jlu Communication Design InstituteLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.008 = CN¥8.9m ÷ (CN¥1.4b - CN¥277m) (Based on the trailing twelve months to September 2023).
Therefore, Jilin Jlu Communication Design InstituteLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the IT industry average of 4.3%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Jilin Jlu Communication Design InstituteLtd has performed in the past in other metrics, you can view this free graph of Jilin Jlu Communication Design InstituteLtd's past earnings, revenue and cash flow.
How Are Returns Trending?
We weren't thrilled with the trend because Jilin Jlu Communication Design InstituteLtd's ROCE has reduced by 83% over the last five years, while the business employed 48% more capital. Usually this isn't ideal, but given Jilin Jlu Communication Design InstituteLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Jilin Jlu Communication Design InstituteLtd's earnings and if they change as a result from the capital raise.
The Bottom Line On Jilin Jlu Communication Design InstituteLtd's ROCE
To conclude, we've found that Jilin Jlu Communication Design InstituteLtd is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Jilin Jlu Communication Design InstituteLtd has the makings of a multi-bagger.
One final note, you should learn about the 2 warning signs we've spotted with Jilin Jlu Communication Design InstituteLtd (including 1 which doesn't sit too well with us) .
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.