Investors Could Be Concerned With Beijing Beimo High-tech Frictional MaterialLtd's (SZSE:002985) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Beijing Beimo High-tech Frictional MaterialLtd (SZSE:002985) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Beijing Beimo High-tech Frictional MaterialLtd is:

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

0.098 = CN¥397m ÷ (CN¥4.7b - CN¥651m) (Based on the trailing twelve months to September 2023).

So, Beijing Beimo High-tech Frictional MaterialLtd has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 5.4% generated by the Aerospace & Defense industry, it's much better.

See our latest analysis for Beijing Beimo High-tech Frictional MaterialLtd

Above you can see how the current ROCE for Beijing Beimo High-tech Frictional MaterialLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Beijing Beimo High-tech Frictional MaterialLtd for free.

So How Is Beijing Beimo High-tech Frictional MaterialLtd's ROCE Trending?

When we looked at the ROCE trend at Beijing Beimo High-tech Frictional MaterialLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Beijing Beimo High-tech Frictional MaterialLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 58% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Beijing Beimo High-tech Frictional MaterialLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002985 on our platform quite valuable.

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.