Investors Could Be Concerned With Beijing Trust&Far TechnologyLTD's (SZSE:300231) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Beijing Trust&Far TechnologyLTD (SZSE:300231), it didn't seem to tick all of these boxes.

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. To calculate this metric for Beijing Trust&Far TechnologyLTD, this is the formula:

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

0.039 = CN¥77m ÷ (CN¥2.8b - CN¥830m) (Based on the trailing twelve months to September 2024).

Thus, Beijing Trust&Far TechnologyLTD has an ROCE of 3.9%. Even though it's in line with the industry average of 3.7%, it's still a low return by itself.

View our latest analysis for Beijing Trust&Far TechnologyLTD

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Beijing Trust&Far TechnologyLTD has performed in the past in other metrics, you can view this free graph of Beijing Trust&Far TechnologyLTD's past earnings, revenue and cash flow.

What Does the ROCE Trend For Beijing Trust&Far TechnologyLTD Tell Us?

In terms of Beijing Trust&Far TechnologyLTD's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Beijing Trust&Far TechnologyLTD has done well to pay down its current liabilities to 30% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Beijing Trust&Far TechnologyLTD's ROCE

We're a bit apprehensive about Beijing Trust&Far TechnologyLTD because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 118% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 5 warning signs with Beijing Trust&Far TechnologyLTD (at least 3 which are a bit concerning) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.