Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Jiangsu Shagang (SZSE:002075) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Jiangsu Shagang, this is the formula:

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

0.0073 = CN¥76m ÷ (CN¥22b - CN¥11b) (Based on the trailing twelve months to March 2024).

Therefore, Jiangsu Shagang has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.7%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Shagang's ROCE against it's prior returns. If you're interested in investigating Jiangsu Shagang's past further, check out this free graph covering Jiangsu Shagang's past earnings, revenue and cash flow.

What Does the ROCE Trend For Jiangsu Shagang Tell Us?

When we looked at the ROCE trend at Jiangsu Shagang, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.7% from 32% five years ago. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 52%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.7%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Jiangsu Shagang's ROCE

We're a bit apprehensive about Jiangsu Shagang because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 39% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Jiangsu Shagang does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those can't be ignored...

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.

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