Returns On Capital At China Bester Group Telecom (SHSE:603220) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think China Bester Group Telecom (SHSE:603220) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for China Bester Group Telecom:

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

0.07 = CN¥294m ÷ (CN¥7.7b - CN¥3.5b) (Based on the trailing twelve months to September 2024).

So, China Bester Group Telecom has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 11%.

Check out our latest analysis for China Bester Group Telecom

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Bester Group Telecom's ROCE against it's prior returns. If you're interested in investigating China Bester Group Telecom's past further, check out this free graph covering China Bester Group Telecom's past earnings, revenue and cash flow.

So How Is China Bester Group Telecom's ROCE Trending?

In terms of China Bester Group Telecom's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 10%, but since then they've fallen to 7.0%. 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.

Another thing to note, China Bester Group Telecom has a high ratio of current liabilities to total assets of 46%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

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. Although the market must be expecting these trends to improve because the stock has gained 43% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching China Bester Group Telecom, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.