What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at China Bester Group Telecom (SHSE:603220), it didn't seem to tick all of these boxes.
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 China Bester Group Telecom:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = CN¥173m ÷ (CN¥5.3b - CN¥3.3b) (Based on the trailing twelve months to September 2023).
So, China Bester Group Telecom has an ROCE of 9.0%. Ultimately, that's a low return and it under-performs the Telecom industry average of 12%.
See our latest analysis for China Bester Group Telecom
In the above chart we have measured China Bester Group Telecom's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From China Bester Group Telecom's ROCE Trend?
In terms of China Bester Group Telecom's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.0% from 23% 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.
Another thing to note, China Bester Group Telecom has a high ratio of current liabilities to total assets of 63%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that China Bester Group Telecom is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 247% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
China Bester Group Telecom does have some risks though, and we've spotted 3 warning signs for China Bester Group Telecom that you might be interested in.
While China Bester Group Telecom 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.