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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Beijing Yuanliu Hongyuan Electronic Technology (SHSE:603267) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Beijing Yuanliu Hongyuan Electronic Technology is:

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

0.11 = CN¥450m ÷ (CN¥5.2b - CN¥1.0b) (Based on the trailing twelve months to September 2023).

So, Beijing Yuanliu Hongyuan Electronic Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Electronic industry.

Above you can see how the current ROCE for Beijing Yuanliu Hongyuan Electronic Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Beijing Yuanliu Hongyuan Electronic Technology for free.

What Does the ROCE Trend For Beijing Yuanliu Hongyuan Electronic Technology Tell Us?

On the surface, the trend of ROCE at Beijing Yuanliu Hongyuan Electronic Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Beijing Yuanliu Hongyuan Electronic Technology's ROCE

In summary, we're somewhat concerned by Beijing Yuanliu Hongyuan Electronic Technology's diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 70% over the last three years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Beijing Yuanliu Hongyuan Electronic Technology does have some risks though, and we've spotted 2 warning signs for Beijing Yuanliu Hongyuan Electronic Technology that you might be interested in.

While Beijing Yuanliu Hongyuan Electronic Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.