Beijing LongRuan Technologies' (SHSE:688078) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Beijing LongRuan Technologies (SHSE:688078), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Beijing LongRuan Technologies, this is the formula:

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

0.14 = CN¥100m ÷ (CN¥849m - CN¥140m) (Based on the trailing twelve months to September 2023).

So, Beijing LongRuan Technologies has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 2.7% generated by the Software industry.

See our latest analysis for Beijing LongRuan Technologies

In the above chart we have measured Beijing LongRuan Technologies' 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 Beijing LongRuan Technologies .

So How Is Beijing LongRuan Technologies' ROCE Trending?

In terms of Beijing LongRuan Technologies' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 19% five years ago. 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 related note, Beijing LongRuan Technologies has decreased its current liabilities to 17% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

While returns have fallen for Beijing LongRuan Technologies in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 32% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Beijing LongRuan Technologies does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

While Beijing LongRuan Technologies 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.