• Thu. Apr 18th, 2024

Jiangsu Tongxingbao Intelligent Transportation Technology (SZSE:301339) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Jiangsu Tongxingbao Intelligent Transportation Technology (SZSE:301339), we don’t think it’s current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Jiangsu Tongxingbao Intelligent Transportation Technology, this is the formula:

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

0.051 = CN¥134m ÷ (CN¥5.3b – CN¥2.7b) (Based on the trailing twelve months to September 2023).

Thus, Jiangsu Tongxingbao Intelligent Transportation Technology has an ROCE of 5.1%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 5.2%.

Check out our latest analysis for Jiangsu Tongxingbao Intelligent Transportation Technology

roce
SZSE:301339 Return on Capital Employed February 26th 2024

Above you can see how the current ROCE for Jiangsu Tongxingbao Intelligent Transportation Technology compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Jiangsu Tongxingbao Intelligent Transportation Technology for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Jiangsu Tongxingbao Intelligent Transportation Technology doesn’t inspire confidence. Over the last five years, returns on capital have decreased to 5.1% from 56% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Jiangsu Tongxingbao Intelligent Transportation Technology has done well to pay down its current liabilities to 50% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE. Either way, they’re still at a pretty high level, so we’d like to see them fall further if possible.

In Conclusion…

While returns have fallen for Jiangsu Tongxingbao Intelligent Transportation Technology in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 24% in the last year. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we’ve identified 1 warning sign with Jiangsu Tongxingbao Intelligent Transportation Technology and understanding this should be part of your investment process.

While Jiangsu Tongxingbao Intelligent Transportation 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.

Valuation is complex, but we’re helping make it simple.

Find out whether Jiangsu Tongxingbao Intelligent Transportation Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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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