There Are Reasons To Feel Uneasy About Beijing Sinnet TechnologyLtd's (SZSE:300383) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Beijing Sinnet TechnologyLtd (SZSE:300383), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for Beijing Sinnet TechnologyLtd, this is the formula:

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

0.027 = CN¥454m ÷ (CN¥20b - CN¥3.3b) (Based on the trailing twelve months to September 2023).

Thus, Beijing Sinnet TechnologyLtd has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the IT industry average of 4.4%.

View our latest analysis for Beijing Sinnet TechnologyLtd

Above you can see how the current ROCE for Beijing Sinnet TechnologyLtd 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 Beijing Sinnet TechnologyLtd for free.

How Are Returns Trending?

When we looked at the ROCE trend at Beijing Sinnet TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.0% over the last five years. However it looks like Beijing Sinnet TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Beijing Sinnet TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 52% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you're still interested in Beijing Sinnet TechnologyLtd it's worth checking out our FREE intrinsic value approximation for 300383 to see if it's trading at an attractive price in other respects.

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.

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

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.