Beijing United Information TechnologyLtd (SHSE:603613) Might Become A Compounding Machine

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Beijing United Information TechnologyLtd (SHSE:603613) looks attractive right now, so lets see what the trend of returns can tell us.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Beijing United Information TechnologyLtd is:

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

0.26 = CN¥2.2b ÷ (CN¥15b - CN¥7.0b) (Based on the trailing twelve months to March 2024).

Thus, Beijing United Information TechnologyLtd has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 5.8% earned by companies in a similar industry.

View our latest analysis for Beijing United Information TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Beijing United Information TechnologyLtd's past further, check out this free graph covering Beijing United Information TechnologyLtd's past earnings, revenue and cash flow.

So How Is Beijing United Information TechnologyLtd's ROCE Trending?

It's hard not to be impressed by Beijing United Information TechnologyLtd's returns on capital. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 1,554% more capital into its operations. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Beijing United Information TechnologyLtd's current liabilities are still rather high at 46% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, we're delighted to see that Beijing United Information TechnologyLtd has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One final note, you should learn about the 2 warning signs we've spotted with Beijing United Information TechnologyLtd (including 1 which is a bit unpleasant) .

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.