Returns On Capital At Beijing Century Real TechnologyLtd (SZSE:300150) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Beijing Century Real TechnologyLtd (SZSE:300150), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Beijing Century Real TechnologyLtd:

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

0.003 = CN¥4.7m ÷ (CN¥2.0b - CN¥449m) (Based on the trailing twelve months to September 2023).

Therefore, Beijing Century Real TechnologyLtd has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.2%.

Check out our latest analysis for Beijing Century Real TechnologyLtd

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

What Does the ROCE Trend For Beijing Century Real TechnologyLtd Tell Us?

In terms of Beijing Century Real TechnologyLtd's historical ROCE trend, it isn't fantastic. The company used to generate 1.5% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 24% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 22%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 30% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Beijing Century Real TechnologyLtd (of which 1 can't be ignored!) that you should know about.

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.