There Are Reasons To Feel Uneasy 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Qingdao NovelBeam TechnologyLtd (SHSE:688677), it didn't seem to tick all of these boxes.

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 Qingdao NovelBeam TechnologyLtd is:

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

0.098 = CN¥130m ÷ (CN¥1.4b - CN¥71m) (Based on the trailing twelve months to September 2024).

Therefore, Qingdao NovelBeam TechnologyLtd has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 5.9% generated by the Medical Equipment industry, it's much better.

See our latest analysis for Qingdao NovelBeam TechnologyLtd

Above you can see how the current ROCE for Qingdao NovelBeam TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Qingdao NovelBeam TechnologyLtd for free.

What Does the ROCE Trend For Qingdao NovelBeam TechnologyLtd Tell Us?

When we looked at the ROCE trend at Qingdao NovelBeam TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. 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 related note, Qingdao NovelBeam TechnologyLtd has decreased its current liabilities to 5.1% 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.

The Bottom Line

We're a bit apprehensive about Qingdao NovelBeam TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 47% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Qingdao NovelBeam TechnologyLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 688677 on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.