There Are Reasons To Feel Uneasy About Beijing Tongyizhong New Material Technology's (SHSE:688722) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Beijing Tongyizhong New Material Technology (SHSE:688722) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Beijing Tongyizhong New Material Technology is:

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

0.069 = CN¥93m ÷ (CN¥1.5b - CN¥175m) (Based on the trailing twelve months to June 2024).

So, Beijing Tongyizhong New Material Technology has an ROCE of 6.9%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

View our latest analysis for Beijing Tongyizhong New Material Technology

Above you can see how the current ROCE for Beijing Tongyizhong New Material Technology 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 Beijing Tongyizhong New Material Technology for free.

The Trend Of ROCE

When we looked at the ROCE trend at Beijing Tongyizhong New Material Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Beijing Tongyizhong New Material Technology's ROCE

In summary, we're somewhat concerned by Beijing Tongyizhong New Material Technology's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 20% 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.

If you want to know some of the risks facing Beijing Tongyizhong New Material Technology we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Beijing Tongyizhong New Material 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.