Some Investors May Be Worried About Taiji Computer's (SZSE:002368) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Taiji Computer (SZSE:002368), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Taiji Computer:

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

0.037 = CN¥210m ÷ (CN¥16b - CN¥10.0b) (Based on the trailing twelve months to September 2024).

Thus, Taiji Computer has an ROCE of 3.7%. Even though it's in line with the industry average of 3.7%, it's still a low return by itself.

See our latest analysis for Taiji Computer

Above you can see how the current ROCE for Taiji Computer compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Taiji Computer for free.

How Are Returns Trending?

In terms of Taiji Computer's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.2%, but since then they've fallen to 3.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Taiji Computer has a high ratio of current liabilities to total assets of 64%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Taiji Computer's ROCE

In summary, Taiji Computer is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 12% in the last five years. Therefore based on the analysis done in this article, we don't think Taiji Computer has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for Taiji Computer you'll probably want to know about.

While Taiji Computer 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.