Beijing Easpring Material TechnologyLTD (SZSE:300073) May Have Issues Allocating Its Capital

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Beijing Easpring Material TechnologyLTD (SZSE:300073), it didn't seem to tick all of these boxes.

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. To calculate this metric for Beijing Easpring Material TechnologyLTD, this is the formula:

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

0.049 = CN¥707m ÷ (CN¥17b - CN¥2.6b) (Based on the trailing twelve months to September 2024).

Thus, Beijing Easpring Material TechnologyLTD has an ROCE of 4.9%. On its own, that's a low figure but it's around the 5.8% average generated by the Electrical industry.

See our latest analysis for Beijing Easpring Material TechnologyLTD

In the above chart we have measured Beijing Easpring Material TechnologyLTD'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 Beijing Easpring Material TechnologyLTD .

How Are Returns Trending?

We weren't thrilled with the trend because Beijing Easpring Material TechnologyLTD's ROCE has reduced by 42% over the last five years, while the business employed 297% more capital. 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. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Beijing Easpring Material TechnologyLTD might not have received a full period of earnings contribution from it.

In Conclusion...

In summary, we're somewhat concerned by Beijing Easpring Material TechnologyLTD's diminishing returns on increasing amounts of capital. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Beijing Easpring Material TechnologyLTD does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Beijing Easpring Material TechnologyLTD 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.