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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Bringspring Science and Technology's (SZSE:300290) returns on capital, so let's have a look.

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 Bringspring Science and Technology:

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

0.025 = CN¥22m ÷ (CN¥1.4b - CN¥518m) (Based on the trailing twelve months to March 2024).

Therefore, Bringspring Science and Technology has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the IT industry average of 3.9%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bringspring Science and Technology's ROCE against it's prior returns. If you're interested in investigating Bringspring Science and Technology's past further, check out this free graph covering Bringspring Science and Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

While the ROCE is still rather low for Bringspring Science and Technology, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 23%. The company is now earning CN¥0.02 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 21% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 36% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

From what we've seen above, Bringspring Science and Technology has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 16% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to know some of the risks facing Bringspring Science and Technology we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Bringspring Science and 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.