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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Both Engineering TechnologyLtd (SHSE:601133) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Both Engineering TechnologyLtd:

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

0.093 = CN¥259m ÷ (CN¥5.1b - CN¥2.3b) (Based on the trailing twelve months to June 2024).

So, Both Engineering TechnologyLtd has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 5.7% generated by the Construction industry, it's much better.

Above you can see how the current ROCE for Both Engineering TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Both Engineering TechnologyLtd .

So How Is Both Engineering TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at Both Engineering TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.3% from 29% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Both Engineering TechnologyLtd's current liabilities are still rather high at 45% of total assets. 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Both Engineering TechnologyLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 16% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Both Engineering TechnologyLtd we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Both Engineering TechnologyLtd 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.