Capital Allocation Trends At Beijing Asiacom Information Technology Co.Ltd (SZSE:301085) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.

Return On Capital Employed (ROCE): What Is It?

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 Asiacom Information Technology Co.Ltd, this is the formula:

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

0.08 = CN¥89m ÷ (CN¥1.7b - CN¥575m) (Based on the trailing twelve months to December 2023).

Therefore, Beijing Asiacom Information Technology Co.Ltd has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Beijing Asiacom Information Technology Co.Ltd.

What Can We Tell From Beijing Asiacom Information Technology Co.Ltd's ROCE Trend?

When we looked at the ROCE trend at Beijing Asiacom Information Technology Co.Ltd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.0% from 45% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Beijing Asiacom Information Technology Co.Ltd has done well to pay down its current liabilities to 34% 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...

In summary, Beijing Asiacom Information Technology Co.Ltd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 78% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Beijing Asiacom Information Technology Co.Ltd, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Beijing Asiacom Information Technology Co.Ltd 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.