Capital Allocation Trends At Beijing China Sciences Runyu Environmental Technology (SZSE:301175) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Beijing China Sciences Runyu Environmental Technology (SZSE:301175) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 China Sciences Runyu Environmental Technology, this is the formula:

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

0.07 = CN¥441m ÷ (CN¥7.5b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Therefore, Beijing China Sciences Runyu Environmental Technology has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.3% generated by the Commercial Services industry, it's much better.

View our latest analysis for Beijing China Sciences Runyu Environmental Technology

Above you can see how the current ROCE for Beijing China Sciences Runyu Environmental 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 China Sciences Runyu Environmental Technology .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Beijing China Sciences Runyu Environmental Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.0% from 9.3% five years ago. However it looks like Beijing China Sciences Runyu Environmental Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Beijing China Sciences Runyu Environmental Technology has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

In Conclusion...

To conclude, we've found that Beijing China Sciences Runyu Environmental Technology is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 19% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Beijing China Sciences Runyu Environmental Technology does have some risks though, and we've spotted 1 warning sign for Beijing China Sciences Runyu Environmental Technology that you might be interested in.

While Beijing China Sciences Runyu Environmental 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.