Capital Allocation Trends At Beijing eGOVA Co (SZSE:300075) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Beijing eGOVA Co (SZSE:300075) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Beijing eGOVA Co, this is the formula:

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

0.026 = CN¥109m ÷ (CN¥4.9b - CN¥669m) (Based on the trailing twelve months to March 2024).

Therefore, Beijing eGOVA Co has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the IT industry average of 3.9%.

Check out our latest analysis for Beijing eGOVA Co

In the above chart we have measured Beijing eGOVA Co's 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 eGOVA Co .

So How Is Beijing eGOVA Co's ROCE Trending?

When we looked at the ROCE trend at Beijing eGOVA Co, we didn't gain much confidence. Around five years ago the returns on capital were 6.6%, but since then they've fallen to 2.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 related note, Beijing eGOVA Co has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Beijing eGOVA Co's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Beijing eGOVA Co have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 50% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for Beijing eGOVA Co you'll probably want to know about.

While Beijing eGOVA Co 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.

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