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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Shandong New Beiyang Information Technology (SZSE:002376) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shandong New Beiyang Information Technology:

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

0.0071 = CN¥33m ÷ (CN¥6.3b - CN¥1.6b) (Based on the trailing twelve months to March 2022).

Thus, Shandong New Beiyang Information Technology has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 3.9%.

Check out our latest analysis for Shandong New Beiyang Information Technology

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're interested in investigating Shandong New Beiyang Information Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Shandong New Beiyang Information Technology's ROCE Trend?

On the surface, the trend of ROCE at Shandong New Beiyang Information Technology doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 0.7%. However it looks like Shandong New Beiyang Information Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Shandong New Beiyang Information Technology's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 30% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Shandong New Beiyang Information Technology has the makings of a multi-bagger.

If you'd like to know more about Shandong New Beiyang Information Technology, we've spotted 4 warning signs, and 2 of them are potentially serious.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.