Returns At Beijing Sifang AutomationLtd (SHSE:601126) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Beijing Sifang AutomationLtd (SHSE:601126) and its trend of ROCE, we really liked what we saw.

What Is 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 Beijing Sifang AutomationLtd, this is the formula:

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

0.17 = CN¥719m ÷ (CN¥9.3b - CN¥5.0b) (Based on the trailing twelve months to June 2024).

So, Beijing Sifang AutomationLtd has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.9% it's much better.

See our latest analysis for Beijing Sifang AutomationLtd

In the above chart we have measured Beijing Sifang AutomationLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Beijing Sifang AutomationLtd .

How Are Returns Trending?

Beijing Sifang AutomationLtd is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 136% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Beijing Sifang AutomationLtd's ROCE

In summary, we're delighted to see that Beijing Sifang AutomationLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 353% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Beijing Sifang AutomationLtd, we've discovered 2 warning signs that you should be aware of.

While Beijing Sifang AutomationLtd 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.

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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.