Beijing Comens New MaterialsLtd (SZSE:300200) May Have Issues Allocating Its Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Beijing Comens New MaterialsLtd (SZSE:300200), so let's see why.

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

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 Comens New MaterialsLtd, this is the formula:

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

0.064 = CN¥104m ÷ (CN¥2.2b - CN¥599m) (Based on the trailing twelve months to September 2024).

So, Beijing Comens New MaterialsLtd has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

See our latest analysis for Beijing Comens New MaterialsLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Beijing Comens New MaterialsLtd has performed in the past in other metrics, you can view this free graph of Beijing Comens New MaterialsLtd's past earnings, revenue and cash flow.

So How Is Beijing Comens New MaterialsLtd's ROCE Trending?

We are a bit worried about the trend of returns on capital at Beijing Comens New MaterialsLtd. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Beijing Comens New MaterialsLtd becoming one if things continue as they have.

On a side note, Beijing Comens New MaterialsLtd's current liabilities have increased over the last five years to 27% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

In summary, it's unfortunate that Beijing Comens New MaterialsLtd is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 1.8% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Beijing Comens New MaterialsLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Beijing Comens New MaterialsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.