Returns On Capital At Beijing Huafeng Test & Control TechnologyLtd (SHSE:688200) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Beijing Huafeng Test & Control TechnologyLtd (SHSE:688200) and its ROCE trend, we weren't exactly thrilled.

What Is 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. 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)

0.056 = CN¥190m ÷ (CN¥3.6b - CN¥157m) (Based on the trailing twelve months to June 2024).

Thus, Beijing Huafeng Test & Control TechnologyLtd has an ROCE of 5.6%. On its own that's a low return, but compared to the average of 4.3% generated by the Semiconductor industry, it's much better.

See 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're interested, you can view the analysts predictions in our free analyst report for Beijing Huafeng Test & Control TechnologyLtd .

How Are Returns Trending?

On the surface, the trend of ROCE at Beijing Huafeng Test & Control TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 30% five years ago. 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 Huafeng Test & Control TechnologyLtd's ROCE

We're a bit apprehensive about Beijing Huafeng Test & Control 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 57% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Beijing Huafeng Test & Control TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Beijing Huafeng Test & Control TechnologyLtd that you might be interested in.

While Beijing Huafeng Test & Control TechnologyLtd 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.