BeijingABT NetworksLtd's (SHSE:688168) Returns On Capital Not Reflecting Well On The Business

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating BeijingABT NetworksLtd (SHSE:688168), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on BeijingABT NetworksLtd is:

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

0.027 = CN¥36m ÷ (CN¥1.6b - CN¥316m) (Based on the trailing twelve months to March 2024).

Therefore, BeijingABT NetworksLtd has an ROCE of 2.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.0%.

Check out our latest analysis for BeijingABT NetworksLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for BeijingABT NetworksLtd's ROCE against it's prior returns. If you're interested in investigating BeijingABT NetworksLtd's past further, check out this free graph covering BeijingABT NetworksLtd's past earnings, revenue and cash flow.

What Can We Tell From BeijingABT NetworksLtd's ROCE Trend?

On the surface, the trend of ROCE at BeijingABT NetworksLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.7% from 25% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On BeijingABT NetworksLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that BeijingABT NetworksLtd 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 44% 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.

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

While BeijingABT NetworksLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com