Capital Allocation Trends At Beijing Zhong Ke San Huan High-Tech (SZSE:000970) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 briefly looking over the numbers, we don't think Beijing Zhong Ke San Huan High-Tech (SZSE:000970) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Beijing Zhong Ke San Huan High-Tech, this is the formula:

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

0.039 = CN¥341m ÷ (CN¥11b - CN¥2.6b) (Based on the trailing twelve months to December 2023).

Thus, Beijing Zhong Ke San Huan High-Tech has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.3%.

Check out our latest analysis for Beijing Zhong Ke San Huan High-Tech

Above you can see how the current ROCE for Beijing Zhong Ke San Huan High-Tech 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 Zhong Ke San Huan High-Tech .

How Are Returns Trending?

On the surface, the trend of ROCE at Beijing Zhong Ke San Huan High-Tech doesn't inspire confidence. To be more specific, ROCE has fallen from 7.2% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line On Beijing Zhong Ke San Huan High-Tech's ROCE

In summary, we're somewhat concerned by Beijing Zhong Ke San Huan High-Tech's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Beijing Zhong Ke San Huan High-Tech does come with some risks, and we've found 1 warning sign that you should be aware of.

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.