Returns On Capital At Beijing GeoEnviron Engineering & Technology (SHSE:603588) Paint A Concerning Picture

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 investigating Beijing GeoEnviron Engineering & Technology (SHSE:603588), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 GeoEnviron Engineering & Technology, this is the formula:

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

0.06 = CN¥981m ÷ (CN¥28b - CN¥12b) (Based on the trailing twelve months to June 2024).

So, Beijing GeoEnviron Engineering & Technology has an ROCE of 6.0%. On its own, that's a low figure but it's around the 5.4% average generated by the Commercial Services industry.

View our latest analysis for Beijing GeoEnviron Engineering & Technology

In the above chart we have measured Beijing GeoEnviron Engineering & Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beijing GeoEnviron Engineering & Technology for free.

What Does the ROCE Trend For Beijing GeoEnviron Engineering & Technology Tell Us?

On the surface, the trend of ROCE at Beijing GeoEnviron Engineering & Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.0% from 9.1% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Beijing GeoEnviron Engineering & Technology has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Beijing GeoEnviron Engineering & Technology's ROCE

While returns have fallen for Beijing GeoEnviron Engineering & Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 23% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Beijing GeoEnviron Engineering & Technology we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While Beijing GeoEnviron Engineering & 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.