Beijing Jiaoda Signal Technology (SZSE:300851) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Beijing Jiaoda Signal Technology (SZSE:300851) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Beijing Jiaoda Signal Technology is:

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

0.06 = CN¥78m ÷ (CN¥1.4b - CN¥122m) (Based on the trailing twelve months to June 2024).

Therefore, Beijing Jiaoda Signal Technology has an ROCE of 6.0%. On its own, that's a low figure but it's around the 5.4% average generated by the Electronic industry.

Check out our latest analysis for Beijing Jiaoda Signal Technology

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

What Can We Tell From Beijing Jiaoda Signal Technology's ROCE Trend?

On the surface, the trend of ROCE at Beijing Jiaoda Signal Technology doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 6.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Beijing Jiaoda Signal Technology has done well to pay down its current liabilities to 8.6% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Beijing Jiaoda Signal Technology. However, despite the promising trends, the stock has fallen 10% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Beijing Jiaoda Signal Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.