Investors Could Be Concerned With Ruijie Networks' (SZSE:301165) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Ruijie Networks (SZSE:301165), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ruijie Networks is:

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

0.066 = CN¥298m ÷ (CN¥9.2b - CN¥4.6b) (Based on the trailing twelve months to September 2024).

So, Ruijie Networks has an ROCE of 6.6%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 4.1%.

Check out our latest analysis for Ruijie Networks

Above you can see how the current ROCE for Ruijie Networks compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ruijie Networks .

So How Is Ruijie Networks' ROCE Trending?

On the surface, the trend of ROCE at Ruijie Networks doesn't inspire confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 6.6%. However it looks like Ruijie Networks might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Ruijie Networks has done well to pay down its current liabilities to 51% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 51% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

To conclude, we've found that Ruijie Networks is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 97% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Ruijie Networks, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

While Ruijie Networks may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.