Saturday, June 15, 2024

Hainan Jinpan Smart Technology (SHSE:688676) Has More To Do To Multiply In Value Going Forward

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If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. That’s why when we briefly looked at Hainan Jinpan Smart Technology’s (SHSE:688676) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hainan Jinpan Smart Technology is:

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

0.12 = CN¥579m ÷ (CN¥8.4b – CN¥3.4b) (Based on the trailing twelve months to March 2024).

Thus, Hainan Jinpan Smart Technology has an ROCE of 12%. On its own, that’s a standard return, however it’s much better than the 6.0% generated by the Electrical industry.

See our latest analysis for Hainan Jinpan Smart Technology

SHSE:688676 Return on Capital Employed May 27th 2024

Above you can see how the current ROCE for Hainan Jinpan Smart Technology compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free analyst report for Hainan Jinpan Smart Technology .

What Can We Tell From Hainan Jinpan Smart Technology’s ROCE Trend?

While the returns on capital are good, they haven’t moved much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 193% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Hainan Jinpan Smart Technology has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, Hainan Jinpan Smart Technology has a high ratio of current liabilities to total assets of 41%. 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.

The Key Takeaway

In the end, Hainan Jinpan Smart Technology has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 263% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 4 warning signs we’ve spotted with Hainan Jinpan Smart Technology (including 2 which are a bit concerning) .

While Hainan Jinpan Smart Technology may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

Find out whether Hainan Jinpan Smart 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.

View the Free Analysis

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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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