Beijing Liven TechnologyLtd's (SZSE:001259) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Beijing Liven TechnologyLtd (SZSE:001259) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Beijing Liven TechnologyLtd, this is the formula:

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

0.021 = CN¥16m ÷ (CN¥835m - CN¥70m) (Based on the trailing twelve months to September 2023).

Therefore, Beijing Liven TechnologyLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.0%.

Check out our latest analysis for Beijing Liven TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Liven TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Beijing Liven TechnologyLtd's past further, check out this free graph covering Beijing Liven TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Beijing Liven TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Beijing Liven TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.1% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Beijing Liven TechnologyLtd has decreased its current liabilities to 8.4% of total assets. That could partly explain why the ROCE has dropped. 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 Key Takeaway

We're a bit apprehensive about Beijing Liven TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Beijing Liven TechnologyLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Beijing Liven TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.