Investors Could Be Concerned With Beijing Aerospace Shenzhou Intelligent Equipment Technology's (SZSE:300455) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. 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?

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 Aerospace Shenzhou Intelligent Equipment Technology is:

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).

Thus, 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 5.2%.

Check out our latest analysis for Beijing Aerospace Shenzhou Intelligent Equipment Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Beijing Aerospace Shenzhou Intelligent Equipment Technology has performed in the past in other metrics, you can view this free graph of Beijing Aerospace Shenzhou Intelligent Equipment Technology's past earnings, revenue and cash flow.

What Can We Tell From Beijing Aerospace Shenzhou Intelligent Equipment Technology's ROCE Trend?

In terms of Beijing Aerospace Shenzhou Intelligent Equipment Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 4.2%. 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. 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.

In Conclusion...

In summary, we're somewhat concerned by Beijing Aerospace Shenzhou Intelligent Equipment Technology's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 87% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Beijing Aerospace Shenzhou Intelligent Equipment Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Beijing Aerospace Shenzhou Intelligent Equipment Technology 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.