Beijing Aerospace Shenzhou Intelligent Equipment Technology (SZSE:300455) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Beijing Aerospace Shenzhou Intelligent Equipment Technology (SZSE:300455), it didn't seem to tick all of these boxes.

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

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 Beijing Aerospace Shenzhou Intelligent Equipment Technology, this is the formula:

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

0.042 = CN¥79m ÷ (CN¥3.3b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

Therefore, Beijing Aerospace Shenzhou Intelligent Equipment Technology has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.3%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Beijing Aerospace Shenzhou Intelligent Equipment Technology.

The Trend Of ROCE

When we looked at the ROCE trend at Beijing Aerospace Shenzhou Intelligent Equipment Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

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. Without this increase, it's likely that ROCE would be even lower than 4.2%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

We're a bit apprehensive about Beijing Aerospace Shenzhou Intelligent Equipment Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 12% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 2 warning signs for Beijing Aerospace Shenzhou Intelligent Equipment Technology (1 is a bit unpleasant) you should be aware of.

While Beijing Aerospace Shenzhou Intelligent Equipment Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.