There's Been No Shortage Of Growth Recently For Beijing Huaru Technology's (SZSE:301302) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Beijing Huaru Technology's (SZSE:301302) returns on capital, so let's have a look.

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

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 Huaru Technology, this is the formula:

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

0.024 = CN¥57m ÷ (CN¥2.5b - CN¥151m) (Based on the trailing twelve months to September 2023).

Therefore, Beijing Huaru Technology has an ROCE of 2.4%. In absolute terms, that's a low return but it's around the Software industry average of 2.7%.

View our latest analysis for Beijing Huaru Technology

In the above chart we have measured Beijing Huaru Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Beijing Huaru Technology .

How Are Returns Trending?

We're delighted to see that Beijing Huaru Technology is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 2.4% on its capital. Not only that, but the company is utilizing 761% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Beijing Huaru Technology's ROCE

In summary, it's great to see that Beijing Huaru Technology has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 51% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Beijing Huaru Technology does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.