If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Guangdong Dtech Technology (SZSE:301377) and its ROCE trend, we weren't exactly thrilled.
What Is 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 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).
Thus, 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 6.0%.
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 analyst report for Guangdong Dtech Technology .
So How Is Guangdong Dtech Technology's ROCE Trending?
In terms of Guangdong Dtech Technology's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 19%, but since then they've fallen to 7.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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. So we could link some of this to the decrease in ROCE. 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.
The Bottom Line
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. Since the stock has declined 12% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Guangdong Dtech Technology has the makings of a multi-bagger.
One more thing, we've spotted 2 warning signs facing Guangdong Dtech Technology that you might find interesting.
While Guangdong Dtech Technology 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.