Returns On Capital At Beijing China Sciences Runyu Environmental Technology (SZSE:301175) Paint A Concerning Picture

Simply Wall St · 10/18 02:41

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Beijing China Sciences Runyu Environmental Technology (SZSE:301175) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 China Sciences Runyu Environmental Technology:

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

0.067 = CN¥409m ÷ (CN¥7.2b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

Thus, Beijing China Sciences Runyu Environmental Technology has an ROCE of 6.7%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 5.6%.

See our latest analysis for Beijing China Sciences Runyu Environmental Technology

roce
SZSE:301175 Return on Capital Employed October 18th 2024

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Beijing China Sciences Runyu Environmental Technology.

So How Is Beijing China Sciences Runyu Environmental Technology's ROCE Trending?

When we looked at the ROCE trend at Beijing China Sciences Runyu Environmental Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.7% from 8.5% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Beijing China Sciences Runyu Environmental Technology has decreased its current liabilities to 15% 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.

Our Take On Beijing China Sciences Runyu Environmental Technology's ROCE

We're a bit apprehensive about Beijing China Sciences Runyu Environmental Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 1.0% over the last year, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Like most companies, Beijing China Sciences Runyu Environmental Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.