Some Investors May Be Worried About Qingdao NovelBeam TechnologyLtd's (SHSE:688677) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Qingdao NovelBeam TechnologyLtd (SHSE:688677), 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. Analysts use this formula to calculate it for Qingdao NovelBeam TechnologyLtd:

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

0.10 = CN¥137m ÷ (CN¥1.4b - CN¥58m) (Based on the trailing twelve months to March 2024).

Thus, Qingdao NovelBeam TechnologyLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Medical Equipment industry.

View our latest analysis for Qingdao NovelBeam TechnologyLtd

In the above chart we have measured Qingdao NovelBeam TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Qingdao NovelBeam TechnologyLtd .

The Trend Of ROCE

When we looked at the ROCE trend at Qingdao NovelBeam TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 28% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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 side note, Qingdao NovelBeam TechnologyLtd has done well to pay down its current liabilities to 4.2% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Qingdao NovelBeam TechnologyLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Qingdao NovelBeam TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 54% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Qingdao NovelBeam TechnologyLtd does have some risks though, and we've spotted 1 warning sign for Qingdao NovelBeam TechnologyLtd 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.

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