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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Bestlink TechnologiesLtd (SHSE:603206) and its ROCE trend, we weren't exactly thrilled.
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 Bestlink TechnologiesLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.098 = CN¥209m ÷ (CN¥4.5b - CN¥2.4b) (Based on the trailing twelve months to March 2023).
So, Bestlink TechnologiesLtd has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the IT industry average of 4.9%.
View our latest analysis for Bestlink TechnologiesLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bestlink TechnologiesLtd's ROCE against it's prior returns. If you'd like to look at how Bestlink TechnologiesLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Bestlink TechnologiesLtd, we didn't gain much confidence. Around four years ago the returns on capital were 22%, but since then they've fallen to 9.8%. However it looks like Bestlink TechnologiesLtd 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 related note, Bestlink TechnologiesLtd has decreased its current liabilities to 53% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 53% is still pretty high, so those risks are still somewhat prevalent.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Bestlink TechnologiesLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Bestlink TechnologiesLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...
While Bestlink TechnologiesLtd 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.