There Are Reasons To Feel Uneasy About Beijing Advanced Digital Technology's (SZSE:300541) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Beijing Advanced Digital Technology (SZSE:300541) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on Beijing Advanced Digital Technology is:

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

0.069 = CN¥112m ÷ (CN¥2.6b - CN¥977m) (Based on the trailing twelve months to June 2024).

Thus, Beijing Advanced Digital Technology has an ROCE of 6.9%. On its own that's a low return, but compared to the average of 3.8% generated by the IT industry, it's much better.

View our latest analysis for Beijing Advanced Digital Technology

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Beijing Advanced Digital Technology.

So How Is Beijing Advanced Digital Technology's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 10% five years ago, while the business's capital employed increased by 101%. That being said, Beijing Advanced Digital Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Beijing Advanced Digital Technology probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Beijing Advanced Digital Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Beijing Advanced Digital Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 27% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 3 warning signs for Beijing Advanced Digital Technology (1 is a bit concerning) you should be aware of.

While Beijing Advanced Digital Technology 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.