Returns On Capital At Beijing SPC Environment Protection Tech (SZSE:002573) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Beijing SPC Environment Protection Tech (SZSE:002573) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Beijing SPC Environment Protection Tech:

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

0.026 = CN¥394m ÷ (CN¥26b - CN¥11b) (Based on the trailing twelve months to September 2024).

Thus, Beijing SPC Environment Protection Tech has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

View our latest analysis for Beijing SPC Environment Protection Tech

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 SPC Environment Protection Tech has performed in the past in other metrics, you can view this free graph of Beijing SPC Environment Protection Tech's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Beijing SPC Environment Protection Tech doesn't inspire confidence. To be more specific, ROCE has fallen from 8.2% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Beijing SPC Environment Protection Tech's current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Beijing SPC Environment Protection Tech's ROCE

Bringing it all together, while we're somewhat encouraged by Beijing SPC Environment Protection Tech's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Beijing SPC Environment Protection Tech does have some risks, we noticed 3 warning signs (and 2 which can't be ignored) we think you should know about.

While Beijing SPC Environment Protection Tech 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.