Investors Could Be Concerned With Beijing Zhong Ke San Huan High-Tech's (SZSE:000970) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Beijing Zhong Ke San Huan High-Tech (SZSE:000970) 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)

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)

0.0029 = CN¥24m ÷ (CN¥10b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Therefore, Beijing Zhong Ke San Huan High-Tech has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.7%.

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

In the above chart we have measured Beijing Zhong Ke San Huan High-Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beijing Zhong Ke San Huan High-Tech for free.

What Does the ROCE Trend For Beijing Zhong Ke San Huan High-Tech Tell Us?

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 5.9% over the last five years. 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.

Our Take On Beijing Zhong Ke San Huan High-Tech's ROCE

We're a bit apprehensive about Beijing Zhong Ke San Huan High-Tech because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 24% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Beijing Zhong Ke San Huan High-Tech you'll probably want to know about.

While Beijing Zhong Ke San Huan High-Tech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.