Investors Could Be Concerned With Beijing Asiacom Information Technology Co.Ltd's (SZSE:301085) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Beijing Asiacom Information Technology Co.Ltd (SZSE:301085), it didn't seem to tick all of these boxes.

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)

0.074 = CN¥82m ÷ (CN¥2.0b - CN¥914m) (Based on the trailing twelve months to September 2024).

Thus, Beijing Asiacom Information Technology Co.Ltd has an ROCE of 7.4%. 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.

See 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'd like to look at how Beijing Asiacom Information Technology Co.Ltd has performed in the past in other metrics, you can view this free graph of Beijing Asiacom Information Technology Co.Ltd's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Beijing Asiacom Information Technology Co.Ltd doesn't inspire confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 7.4%. 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 side note, Beijing Asiacom Information Technology Co.Ltd has done well to pay down its current liabilities to 45% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Beijing Asiacom Information Technology Co.Ltd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Beijing Asiacom Information Technology Co.Ltd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 95% return to shareholders over the last three years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 3 warning signs for Beijing Asiacom Information Technology Co.Ltd that we think you should be aware of.

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.