Nanjing Bestway Intelligent Control Technology (SZSE:301195) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at Nanjing Bestway Intelligent Control Technology (SZSE:301195), 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. To calculate this metric for Nanjing Bestway Intelligent Control Technology, this is the formula:

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

0.09 = CN¥208m ÷ (CN¥2.6b - CN¥333m) (Based on the trailing twelve months to March 2024).

So, Nanjing Bestway Intelligent Control Technology has an ROCE of 9.0%. On its own that's a low return, but compared to the average of 5.2% generated by the Electronic industry, it's much better.

See our latest analysis for Nanjing Bestway Intelligent Control Technology

In the above chart we have measured Nanjing Bestway Intelligent Control Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Nanjing Bestway Intelligent Control Technology .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Nanjing Bestway Intelligent Control Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 50% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Nanjing Bestway Intelligent Control Technology has decreased its current liabilities to 13% of total assets. Since the ratio used to be 70%, that's a significant reduction and it no doubt explains the drop 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nanjing Bestway Intelligent Control Technology. And there could be an opportunity here if other metrics look good too, because the stock has declined 31% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 1 warning sign with Nanjing Bestway Intelligent Control Technology and understanding it should be part of your investment process.

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.

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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.

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