Bestechnic (Shanghai) (SHSE:688608) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Bestechnic (Shanghai) (SHSE:688608) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Bestechnic (Shanghai) is:

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

0.0036 = CN¥22m ÷ (CN¥6.5b - CN¥357m) (Based on the trailing twelve months to March 2024).

So, Bestechnic (Shanghai) has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.6%.

View our latest analysis for Bestechnic (Shanghai)

In the above chart we have measured Bestechnic (Shanghai)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Bestechnic (Shanghai) .

The Trend Of ROCE

On the surface, the trend of ROCE at Bestechnic (Shanghai) doesn't inspire confidence. Around five years ago the returns on capital were 6.2%, but since then they've fallen to 0.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Bestechnic (Shanghai) has done well to pay down its current liabilities to 5.5% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Bestechnic (Shanghai)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Bestechnic (Shanghai) is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 48% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you're still interested in Bestechnic (Shanghai) it's worth checking out our FREE intrinsic value approximation for 688608 to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.