There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Guangdong Dtech Technology (SZSE:301377) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Guangdong Dtech Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = CN¥196m ÷ (CN¥3.1b - CN¥536m) (Based on the trailing twelve months to September 2023).
Therefore, Guangdong Dtech Technology has an ROCE of 7.7%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.2%.
Check out our latest analysis for Guangdong Dtech Technology
Above you can see how the current ROCE for Guangdong Dtech Technology 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 report for Guangdong Dtech Technology.
The Trend Of ROCE
When we looked at the ROCE trend at Guangdong Dtech Technology, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 7.7% from 19% four years ago. However it looks like Guangdong Dtech 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.
On a side note, Guangdong Dtech Technology has done well to pay down its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Guangdong Dtech Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Guangdong Dtech Technology does have some risks though, and we've spotted 3 warning signs for Guangdong Dtech Technology that you might be interested in.
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.
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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.