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. 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 Bestlink TechnologiesLtd (SHSE:603206), 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. To calculate this metric for Bestlink TechnologiesLtd, this is the formula:

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

0.084 = CN¥188m ÷ (CN¥6.7b - CN¥4.4b) (Based on the trailing twelve months to September 2024).

So, Bestlink TechnologiesLtd has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the IT industry average of 3.8%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Bestlink TechnologiesLtd.

How Are Returns Trending?

On the surface, the trend of ROCE at Bestlink TechnologiesLtd doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 8.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Bestlink TechnologiesLtd has a high ratio of current liabilities to total assets of 66%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Bestlink TechnologiesLtd is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 9.7% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Bestlink TechnologiesLtd (of which 1 is a bit unpleasant!) that you should know about.

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.