There Are Reasons To Feel Uneasy About Beijing Originwater Technology's (SZSE:300070) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Beijing Originwater Technology (SZSE:300070) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Beijing Originwater Technology is:

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

0.021 = CN¥1.1b ÷ (CN¥79b - CN¥28b) (Based on the trailing twelve months to March 2024).

Thus, Beijing Originwater Technology has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 4.6%.

View our latest analysis for Beijing Originwater Technology

Above you can see how the current ROCE for Beijing Originwater Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Beijing Originwater Technology .

What The Trend Of ROCE Can Tell Us

In terms of Beijing Originwater Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.1% from 5.1% 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.

The Key Takeaway

To conclude, we've found that Beijing Originwater Technology is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Beijing Originwater Technology has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Beijing Originwater Technology (including 1 which is a bit unpleasant) .

While Beijing Originwater 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com