Be Wary Of Beijing Beida Jade Bird Universal Sci-Tech (HKG:8095) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Beijing Beida Jade Bird Universal Sci-Tech (HKG:8095), we don't think it's current trends fit the mold of a multi-bagger.

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 Beida Jade Bird Universal Sci-Tech:

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

0.0075 = CN¥26m ÷ (CN¥3.7b - CN¥192m) (Based on the trailing twelve months to December 2020).

So, Beijing Beida Jade Bird Universal Sci-Tech has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 3.6%.

View our latest analysis for Beijing Beida Jade Bird Universal Sci-Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Beida Jade Bird Universal Sci-Tech's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Beijing Beida Jade Bird Universal Sci-Tech, check out these free graphs here.

What Can We Tell From Beijing Beida Jade Bird Universal Sci-Tech's ROCE Trend?

When we looked at the ROCE trend at Beijing Beida Jade Bird Universal Sci-Tech, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 0.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Beijing Beida Jade Bird Universal Sci-Tech has done well to pay down its current liabilities to 5.3% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

While returns have fallen for Beijing Beida Jade Bird Universal Sci-Tech in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 56% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Beijing Beida Jade Bird Universal Sci-Tech (of which 1 is significant!) that you should know about.

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. 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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