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. So when we looked at Beijing Ultrapower Software (SZSE:300002) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Beijing Ultrapower Software is:

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

0.18 = CN¥1.1b ÷ (CN¥7.0b – CN¥878m) (Based on the trailing twelve months to March 2024).

So, Beijing Ultrapower Software has an ROCE of 18%. On its own, that’s a standard return, however it’s much better than the 3.9% generated by the IT industry.

See our latest analysis for Beijing Ultrapower Software

In the above chart we have measured Beijing Ultrapower Software’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for Beijing Ultrapower Software .

What The Trend Of ROCE Can Tell Us

Beijing Ultrapower Software is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 2,047% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.

In Conclusion…

To bring it all together, Beijing Ultrapower Software has done well to increase the returns it’s generating from its capital employed. And a remarkable 114% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it’s worth looking further into this stock because if Beijing Ultrapower Software can keep these trends up, it could have a bright future ahead.

Like most companies, Beijing Ultrapower Software does come with some risks, and we’ve found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected]