Bichamp Cutting Technology (Hunan) (SZSE:002843) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Bichamp Cutting Technology (Hunan) (SZSE:002843) and its ROCE trend, we weren't exactly thrilled.

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 Bichamp Cutting Technology (Hunan), this is the formula:

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

0.06 = CN¥106m ÷ (CN¥2.7b - CN¥940m) (Based on the trailing twelve months to December 2023).

So, Bichamp Cutting Technology (Hunan) has an ROCE of 6.0%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

Check out our latest analysis for Bichamp Cutting Technology (Hunan)

In the above chart we have measured Bichamp Cutting Technology (Hunan)'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 Bichamp Cutting Technology (Hunan) .

What Can We Tell From Bichamp Cutting Technology (Hunan)'s ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 8.5% five years ago, while the business's capital employed increased by 151%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Bichamp Cutting Technology (Hunan) probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Bichamp Cutting Technology (Hunan)'s current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Bichamp Cutting Technology (Hunan)'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 Bichamp Cutting Technology (Hunan). Furthermore the stock has climbed 81% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Bichamp Cutting Technology (Hunan), you might be interested to know about the 3 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.