Bestechnic (Shanghai)'s (SHSE:688608) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Bestechnic (Shanghai) (SHSE:688608), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Bestechnic (Shanghai):

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).

Thus, Bestechnic (Shanghai) has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.1%.

Check out 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, you can check out the forecasts from the analysts covering Bestechnic (Shanghai) for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Bestechnic (Shanghai) doesn't inspire confidence. To be more specific, ROCE has fallen from 6.2% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Bestechnic (Shanghai) has done well to pay down its current liabilities to 5.5% of total assets. That could partly explain why the ROCE has dropped. 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.

Our Take On Bestechnic (Shanghai)'s ROCE

While returns have fallen for Bestechnic (Shanghai) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 53% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

While Bestechnic (Shanghai) doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 688608 on our platform.

While Bestechnic (Shanghai) 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.