There Are Reasons To Feel Uneasy About Beijing Yuanliu Hongyuan Electronic Technology's (SHSE:603267) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Yuanliu Hongyuan Electronic Technology (SHSE:603267) 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)?

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 Yuanliu Hongyuan Electronic Technology, this is the formula:

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

0.037 = CN¥161m ÷ (CN¥5.0b - CN¥745m) (Based on the trailing twelve months to June 2024).

Thus, Beijing Yuanliu Hongyuan Electronic Technology has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

Check out our latest analysis for Beijing Yuanliu Hongyuan Electronic Technology

Above you can see how the current ROCE for Beijing Yuanliu Hongyuan Electronic Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Beijing Yuanliu Hongyuan Electronic Technology .

What Does the ROCE Trend For Beijing Yuanliu Hongyuan Electronic Technology Tell Us?

In terms of Beijing Yuanliu Hongyuan Electronic Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 3.7%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Beijing Yuanliu Hongyuan Electronic Technology's ROCE

We're a bit apprehensive about Beijing Yuanliu Hongyuan Electronic Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 15% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 3 warning signs facing Beijing Yuanliu Hongyuan Electronic Technology that you might find interesting.

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.