Road Environment TechnologyLtd (SHSE:688156) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Road Environment TechnologyLtd (SHSE:688156) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Road Environment TechnologyLtd:

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

0.021 = CN¥25m ÷ (CN¥1.7b - CN¥489m) (Based on the trailing twelve months to June 2024).

So, Road Environment TechnologyLtd has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 4.8%.

See our latest analysis for Road Environment TechnologyLtd

In the above chart we have measured Road Environment TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Road Environment TechnologyLtd .

What Does the ROCE Trend For Road Environment TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Road Environment TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.1% from 16% five years ago. 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.

What We Can Learn From Road Environment TechnologyLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Road Environment TechnologyLtd is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 49% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 1 warning sign facing Road Environment TechnologyLtd that you might find interesting.

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.