Beijing Asiacom Information Technology Co.Ltd (SZSE:301085) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Asiacom Information Technology Co.Ltd (SZSE:301085) 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)

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 Asiacom Information Technology Co.Ltd:

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

0.095 = CN¥103m ÷ (CN¥1.9b - CN¥780m) (Based on the trailing twelve months to June 2024).

Thus, Beijing Asiacom Information Technology Co.Ltd has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.

Check out our latest analysis for Beijing Asiacom Information Technology Co.Ltd

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 Asiacom Information Technology Co.Ltd's past further, check out this free graph covering Beijing Asiacom Information Technology Co.Ltd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Beijing Asiacom Information Technology Co.Ltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 39% 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.

On a related note, Beijing Asiacom Information Technology Co.Ltd has decreased its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. 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. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

In summary, we're somewhat concerned by Beijing Asiacom Information Technology Co.Ltd's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 84% return over the last three years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Beijing Asiacom Information Technology Co.Ltd does have some risks, we noticed 4 warning signs (and 3 which are a bit concerning) we think you should know about.

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.