Capital Allocation Trends At China Bester Group Telecom (SHSE:603220) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at China Bester Group Telecom (SHSE:603220) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for China Bester Group Telecom, this is the formula:

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

0.077 = CN¥226m ÷ (CN¥6.1b - CN¥3.2b) (Based on the trailing twelve months to March 2024).

So, China Bester Group Telecom has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Telecom industry average of 11%.

See our latest analysis for China Bester Group Telecom

In the above chart we have measured China Bester Group Telecom's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Bester Group Telecom for free.

The Trend Of ROCE

In terms of China Bester Group Telecom's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.7% from 13% five years ago. However it looks like China Bester Group Telecom 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.

Another thing to note, China Bester Group Telecom has a high ratio of current liabilities to total assets of 52%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On China Bester Group Telecom's ROCE

Bringing it all together, while we're somewhat encouraged by China Bester Group Telecom's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

China Bester Group Telecom does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

While China Bester Group Telecom 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.