Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 investigating Dian Diagnostics GroupLtd (SZSE:300244), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dian Diagnostics GroupLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CN¥1.2b ÷ (CN¥19b - CN¥5.2b) (Based on the trailing twelve months to September 2023).
Thus, Dian Diagnostics GroupLtd has an ROCE of 9.1%. On its own, that's a low figure but it's around the 11% average generated by the Healthcare industry.
Check out our latest analysis for Dian Diagnostics GroupLtd
Above you can see how the current ROCE for Dian Diagnostics GroupLtd 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 Dian Diagnostics GroupLtd.
How Are Returns Trending?
On the surface, the trend of ROCE at Dian Diagnostics GroupLtd doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line
We're a bit apprehensive about Dian Diagnostics GroupLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 47% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you'd like to know about the risks facing Dian Diagnostics GroupLtd, we've discovered 1 warning sign that you should be aware of.
While Dian Diagnostics GroupLtd 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.