There Are Reasons To Feel Uneasy About Beijing Telesound Electronics' (SZSE:003004) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Beijing Telesound Electronics (SZSE:003004) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Beijing Telesound Electronics:

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

0.0098 = CN¥9.7m ÷ (CN¥1.1b - CN¥118m) (Based on the trailing twelve months to September 2024).

Therefore, Beijing Telesound Electronics has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.3%.

View our latest analysis for Beijing Telesound Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Telesound Electronics' ROCE against it's prior returns. If you'd like to look at how Beijing Telesound Electronics has performed in the past in other metrics, you can view this free graph of Beijing Telesound Electronics' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Beijing Telesound Electronics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.0% from 33% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Beijing Telesound Electronics has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Beijing Telesound Electronics' ROCE

To conclude, we've found that Beijing Telesound Electronics is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 11% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Beijing Telesound Electronics we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Beijing Telesound Electronics 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.