Here's What's Concerning About Beijing Huafeng Test & Control TechnologyLtd's (SHSE:688200) Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Beijing Huafeng Test & Control TechnologyLtd (SHSE:688200), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Beijing Huafeng Test & Control TechnologyLtd is:

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

0.049 = CN¥164m ÷ (CN¥3.5b - CN¥108m) (Based on the trailing twelve months to March 2024).

Therefore, Beijing Huafeng Test & Control TechnologyLtd has an ROCE of 4.9%. On its own that's a low return, but compared to the average of 4.0% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for Beijing Huafeng Test & Control TechnologyLtd

Above you can see how the current ROCE for Beijing Huafeng Test & Control TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Beijing Huafeng Test & Control TechnologyLtd .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Beijing Huafeng Test & Control TechnologyLtd doesn't inspire confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 4.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a related note, Beijing Huafeng Test & Control TechnologyLtd has decreased its current liabilities to 3.1% 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.

What We Can Learn From Beijing Huafeng Test & Control TechnologyLtd's ROCE

In summary, we're somewhat concerned by Beijing Huafeng Test & Control TechnologyLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 44% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 1 warning sign facing Beijing Huafeng Test & Control TechnologyLtd that you might find interesting.

While Beijing Huafeng Test & Control TechnologyLtd 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.