Beijing Aerospace Shenzhou Intelligent Equipment Technology (SZSE:300455) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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 Aerospace Shenzhou Intelligent Equipment Technology (SZSE:300455) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Beijing Aerospace Shenzhou Intelligent Equipment Technology is:

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

0.048 = CN¥91m ÷ (CN¥3.3b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

So, Beijing Aerospace Shenzhou Intelligent Equipment Technology has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.6%.

See our latest analysis for Beijing Aerospace Shenzhou Intelligent Equipment Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Aerospace Shenzhou Intelligent Equipment Technology's ROCE against it's prior returns. If you're interested in investigating Beijing Aerospace Shenzhou Intelligent Equipment Technology's past further, check out this free graph covering Beijing Aerospace Shenzhou Intelligent Equipment Technology's past earnings, revenue and cash flow.

So How Is Beijing Aerospace Shenzhou Intelligent Equipment Technology's ROCE Trending?

When we looked at the ROCE trend at Beijing Aerospace Shenzhou Intelligent Equipment Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.8% from 19% five years ago. However it looks like Beijing Aerospace Shenzhou Intelligent Equipment Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Beijing Aerospace Shenzhou Intelligent Equipment Technology's current liabilities have increased over the last five years to 42% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Beijing Aerospace Shenzhou Intelligent Equipment Technology's ROCE

In summary, Beijing Aerospace Shenzhou Intelligent Equipment Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 3 warning signs for Beijing Aerospace Shenzhou Intelligent Equipment Technology (1 doesn't sit too well with us) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com