Jiangnan Mould & Plastic Technology (SZSE:000700) Is Experiencing Growth In Returns On Capital

Simply Wall St · 10/14 22:31

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Jiangnan Mould & Plastic Technology (SZSE:000700) so let's look a bit deeper.

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 Jiangnan Mould & Plastic Technology, this is the formula:

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

0.081 = CN¥317m ÷ (CN¥8.7b - CN¥4.8b) (Based on the trailing twelve months to June 2024).

Thus, Jiangnan Mould & Plastic Technology has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Auto Components industry average of 7.2%.

Check out our latest analysis for Jiangnan Mould & Plastic Technology

roce
SZSE:000700 Return on Capital Employed October 14th 2024

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 Jiangnan Mould & Plastic Technology has performed in the past in other metrics, you can view this free graph of Jiangnan Mould & Plastic Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Jiangnan Mould & Plastic Technology is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 8.1%, which is always encouraging. While returns have increased, the amount of capital employed by Jiangnan Mould & Plastic Technology has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a side note, Jiangnan Mould & Plastic Technology's current liabilities are still rather high at 55% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Jiangnan Mould & Plastic Technology's ROCE

In summary, we're delighted to see that Jiangnan Mould & Plastic Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 77% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Jiangnan Mould & Plastic Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Jiangnan Mould & Plastic Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.