Investors Could Be Concerned With Beijing Haohan Data TechnologyLtd's (SHSE:688292) 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Beijing Haohan Data TechnologyLtd (SHSE:688292) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Beijing Haohan Data TechnologyLtd is:

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

0.026 = CN¥30m ÷ (CN¥1.4b - CN¥223m) (Based on the trailing twelve months to December 2024).

Therefore, Beijing Haohan Data TechnologyLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.0%.

View our latest analysis for Beijing Haohan Data TechnologyLtd

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're interested in investigating Beijing Haohan Data TechnologyLtd's past further, check out this free graph covering Beijing Haohan Data TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Beijing Haohan Data TechnologyLtd Tell Us?

When we looked at the ROCE trend at Beijing Haohan Data TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.6% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Beijing Haohan Data TechnologyLtd has decreased its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, we're somewhat concerned by Beijing Haohan Data TechnologyLtd's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 4.7% in the last year. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Beijing Haohan Data TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.