Investors Could Be Concerned With Beijing Waluer Information Technology's (SZSE:301380) 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Beijing Waluer Information Technology (SZSE:301380), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Waluer Information Technology, this is the formula:

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

0.087 = CN¥73m ÷ (CN¥1.2b - CN¥395m) (Based on the trailing twelve months to June 2024).

Therefore, Beijing Waluer Information Technology has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the IT industry average of 3.8%.

Check out our latest analysis for Beijing Waluer Information Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Waluer Information Technology's ROCE against it's prior returns. If you're interested in investigating Beijing Waluer Information Technology's past further, check out this free graph covering Beijing Waluer Information Technology's past earnings, revenue and cash flow.

So How Is Beijing Waluer Information Technology's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 38% five years ago, while capital employed has grown 434%. That being said, Beijing Waluer Information Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Beijing Waluer Information 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.7%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Beijing Waluer Information Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Beijing Waluer Information Technology is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 17% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 5 warning signs for Beijing Waluer Information Technology (2 are a bit concerning) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.