Dalian Demaishi Precision Technology (SZSE:301007) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Dalian Demaishi Precision Technology (SZSE:301007) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Dalian Demaishi Precision Technology is:

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

0.076 = CN¥53m ÷ (CN¥1.0b - CN¥334m) (Based on the trailing twelve months to September 2024).

Therefore, Dalian Demaishi Precision Technology has an ROCE of 7.6%. On its own, that's a low figure but it's around the 7.0% average generated by the Auto Components industry.

See our latest analysis for Dalian Demaishi Precision Technology

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're interested in investigating Dalian Demaishi Precision Technology's past further, check out this free graph covering Dalian Demaishi Precision Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Dalian Demaishi Precision Technology doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Dalian Demaishi Precision Technology has decreased its current liabilities to 33% 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.

Our Take 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. However, total returns to shareholders over the last three years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Dalian Demaishi Precision Technology does have some risks though, and we've spotted 1 warning sign for Dalian Demaishi Precision 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.