Beijing GeoEnviron Engineering & Technology (SHSE:603588) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Beijing GeoEnviron Engineering & Technology (SHSE:603588) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Beijing GeoEnviron Engineering & Technology, this is the formula:

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

0.067 = CN¥1.1b ÷ (CN¥26b - CN¥9.9b) (Based on the trailing twelve months to September 2023).

Therefore, Beijing GeoEnviron Engineering & Technology has an ROCE of 6.7%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 5.5%.

View our latest analysis for Beijing GeoEnviron Engineering & Technology

Above you can see how the current ROCE for Beijing GeoEnviron Engineering & Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Beijing GeoEnviron Engineering & Technology .

The Trend Of ROCE

On the surface, the trend of ROCE at Beijing GeoEnviron Engineering & Technology doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 6.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Beijing GeoEnviron Engineering & Technology is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 12% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 3 warning signs with Beijing GeoEnviron Engineering & Technology (at least 2 which can't be ignored) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.