Stock Analysis

Dalian Demaishi Precision Technology (SZSE:301007) Is Reinvesting At Lower Rates Of Return

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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Dalian Demaishi Precision Technology (SZSE:301007), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Dalian Demaishi Precision Technology, this is the formula:

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

0.068 = CN¥46m ÷ (CN¥1.0b - CN¥329m) (Based on the trailing twelve months to September 2023).

So, Dalian Demaishi Precision Technology has an ROCE of 6.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.6%.

View our latest analysis for Dalian Demaishi Precision Technology

SZSE:301007 Return on Capital Employed April 14th 2024

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dalian Demaishi Precision Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Dalian Demaishi Precision Technology.

What Can We Tell From Dalian Demaishi Precision Technology's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 16% five years ago, while the business's capital employed increased by 114%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Dalian Demaishi Precision Technology's earnings and if they change as a result from the capital raise.

On a related note, Dalian Demaishi Precision Technology has decreased its current liabilities to 33% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Dalian Demaishi Precision Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Dalian Demaishi Precision Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 9.3% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 2 warning signs we've spotted with Dalian Demaishi Precision Technology (including 1 which makes us a bit uncomfortable) .

While Dalian Demaishi Precision 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.

Valuation is complex, but we're helping make it simple.

Find out whether Dalian Demaishi Precision Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.