JinkoSolar Holding (NYSE:JKS) Reinvests at Lower Rates of Return

If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Ideally, a business will show two trends; first growth to return to on capital employed (ROCE) and on the other hand, growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. In light of this, when we looked JinkoSolar Holding (NYSE:JKS) and its ROCE trend, we weren’t exactly thrilled.

Understanding return on capital employed (ROCE)

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on JinkoSolar Holding is:

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

0.029 = CN¥1.1b ÷ (CN¥92b – CN¥54b) (Based on the last twelve months to March 2022).

So, JinkoSolar Holding has a ROCE of 2.9%. Ultimately, that’s a poor performer, and it underperforms the semiconductor industry average by 14%.

Check out our latest analysis for JinkoSolar Holding

NYSE:JKS Return on Capital Employed May 10, 2022

In the chart above, we measured JinkoSolar Holding’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for JinkoSolar Holding.

What does JinkoSolar Holding’s ROCE trend tell us?

When we looked at the ROCE trend at JinkoSolar Holding, we didn’t gain much confidence. About five years ago, the return on capital was 13%, but since then it has fallen to 2.9%. However, given that capital employed and revenue have both increased, it appears that the company is currently continuing to grow, following short-term returns. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.

On the other hand, JinkoSolar Holding has done well to repay its short-term debts to 58% of total assets. This could partly explain why ROCE fell. In effect, this means that their suppliers or short-term creditors finance the business less, which reduces certain elements of risk. Since the company is essentially funding more of its operations with its own money, one could argue that this has made the company less efficient at generating ROCE. Either way, they’re still at a pretty high level, so we’d like to see them drop more if possible.

The essential

While yields have fallen for JinkoSolar Holding lately, we are encouraged to see that sales are increasing and the company is reinvesting in its operations. And long-term investors should be optimistic going forward as the stock has returned a whopping 171% to shareholders over the past five years. So while investors seem to be recognizing these promising trends, we would be looking further into this stock to make sure the other metrics justify the positive view.

Finally we found 3 warning signs for JinkoSolar Holding (1 doesn’t sit too well with us) you should know.

If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.