Beijing Dabeinong Technology GroupLtd (SZSE:002385) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Beijing Dabeinong Technology GroupLtd (SZSE:002385), it didn't seem to tick all of these boxes.

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 Dabeinong Technology GroupLtd, this is the formula:

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

0.018 = CN¥288m ÷ (CN¥32b - CN¥15b) (Based on the trailing twelve months to September 2023).

Therefore, Beijing Dabeinong Technology GroupLtd has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.6%.

View our latest analysis for Beijing Dabeinong Technology GroupLtd

In the above chart we have measured Beijing Dabeinong Technology GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beijing Dabeinong Technology GroupLtd for free.

What Can We Tell From Beijing Dabeinong Technology GroupLtd's ROCE Trend?

On the surface, the trend of ROCE at Beijing Dabeinong Technology GroupLtd doesn't inspire confidence. Around five years ago the returns on capital were 6.2%, but since then they've fallen to 1.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Beijing Dabeinong Technology GroupLtd has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Beijing Dabeinong Technology GroupLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Beijing Dabeinong Technology GroupLtd. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Beijing Dabeinong Technology GroupLtd does have some risks though, and we've spotted 2 warning signs for Beijing Dabeinong Technology GroupLtd that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.