Investors Will Want Beijing Jingyi Automation Equipment's (SHSE:688652) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Beijing Jingyi Automation Equipment's (SHSE:688652) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Beijing Jingyi Automation Equipment:

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

0.047 = CN¥101m ÷ (CN¥3.8b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

So, Beijing Jingyi Automation Equipment has an ROCE of 4.7%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.

See our latest analysis for Beijing Jingyi Automation Equipment

In the above chart we have measured Beijing Jingyi Automation Equipment'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 Beijing Jingyi Automation Equipment for free.

How Are Returns Trending?

The fact that Beijing Jingyi Automation Equipment is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 4.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Beijing Jingyi Automation Equipment is utilizing 781% more capital than it was four years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Another thing to note, Beijing Jingyi Automation Equipment has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To the delight of most shareholders, Beijing Jingyi Automation Equipment has now broken into profitability. Given the stock has declined 14% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 2 warning signs with Beijing Jingyi Automation Equipment and understanding them should be part of your investment process.

While Beijing Jingyi Automation Equipment 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.