Both Engineering TechnologyLtd (SHSE:601133) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Both Engineering TechnologyLtd (SHSE:601133) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on Both Engineering TechnologyLtd is:

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

0.10 = CN¥282m ÷ (CN¥4.6b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

Thus, Both Engineering TechnologyLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Construction industry.

View our latest analysis for Both Engineering TechnologyLtd

In the above chart we have measured Both Engineering TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Both Engineering TechnologyLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Both Engineering TechnologyLtd, we didn't gain much confidence. Around four years ago the returns on capital were 29%, but since then they've fallen to 10%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Both Engineering TechnologyLtd has decreased its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Both Engineering TechnologyLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Both Engineering TechnologyLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 42% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Both Engineering TechnologyLtd does have some risks though, and we've spotted 1 warning sign for Both Engineering TechnologyLtd that you might be interested in.

While Both Engineering TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.