Here's What's Concerning About Beijing Tianma Intelligent Control Technology's (SHSE:688570) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Beijing Tianma Intelligent Control Technology (SHSE:688570) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Beijing Tianma Intelligent Control Technology:

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

0.09 = CN¥386m ÷ (CN¥5.4b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Thus, Beijing Tianma Intelligent Control Technology has an ROCE of 9.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.

View our latest analysis for Beijing Tianma Intelligent Control Technology

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'd like to look at how Beijing Tianma Intelligent Control Technology has performed in the past in other metrics, you can view this free graph of Beijing Tianma Intelligent Control Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Beijing Tianma Intelligent Control Technology Tell Us?

When we looked at the ROCE trend at Beijing Tianma Intelligent Control Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Beijing Tianma Intelligent Control Technology has done well to pay down its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. 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.

Our Take On Beijing Tianma Intelligent Control Technology's ROCE

We're a bit apprehensive about Beijing Tianma Intelligent Control Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last year have experienced a 26% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Beijing Tianma Intelligent Control Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.