Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Beijing Jingyuntong Technology (SHSE:601908), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Beijing Jingyuntong Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = CN¥627m ÷ (CN¥24b - CN¥7.1b) (Based on the trailing twelve months to September 2023).
So, Beijing Jingyuntong Technology has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Jingyuntong Technology's ROCE against it's prior returns. If you're interested in investigating Beijing Jingyuntong Technology's past further, check out this free graph covering Beijing Jingyuntong Technology's past earnings, revenue and cash flow.
What Does the ROCE Trend For Beijing Jingyuntong Technology Tell Us?
On the surface, the trend of ROCE at Beijing Jingyuntong Technology doesn't inspire confidence. Around five years ago the returns on capital were 6.7%, but since then they've fallen to 3.8%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Beijing Jingyuntong Technology's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Beijing Jingyuntong Technology. And there could be an opportunity here if other metrics look good too, because the stock has declined 14% in 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.
If you're still interested in Beijing Jingyuntong Technology it's worth checking out our FREE intrinsic value approximation for 601908 to see if it's trading at an attractive price in other respects.
While Beijing Jingyuntong Technology 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.