Beijing Infosec TechnologiesLtd (SHSE:688201) Could Be Struggling To Allocate Capital

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Beijing Infosec TechnologiesLtd (SHSE:688201) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Beijing Infosec TechnologiesLtd:

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

0.00072 = CN¥1.0m ÷ (CN¥1.6b - CN¥168m) (Based on the trailing twelve months to December 2023).

Thus, Beijing Infosec TechnologiesLtd has an ROCE of 0.07%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.9%.

View our latest analysis for Beijing Infosec TechnologiesLtd

In the above chart we have measured Beijing Infosec TechnologiesLtd'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 Infosec TechnologiesLtd for free.

So How Is Beijing Infosec TechnologiesLtd's ROCE Trending?

When we looked at the ROCE trend at Beijing Infosec TechnologiesLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.07% from 32% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Beijing Infosec TechnologiesLtd has done well to pay down its current liabilities to 11% 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

We're a bit apprehensive about Beijing Infosec TechnologiesLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Beijing Infosec TechnologiesLtd (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Beijing Infosec TechnologiesLtd 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.