Be Wary Of Ningbo Deye Technology Group (SHSE:605117) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Ningbo Deye Technology Group (SHSE:605117), we aren't jumping out of our chairs because returns are decreasing.

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. To calculate this metric for Ningbo Deye Technology Group, this is the formula:

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

0.26 = CN¥1.7b ÷ (CN¥11b - CN¥4.7b) (Based on the trailing twelve months to March 2024).

Therefore, Ningbo Deye Technology Group has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 5.6% earned by companies in a similar industry.

Check out our latest analysis for Ningbo Deye Technology Group

Above you can see how the current ROCE for Ningbo Deye Technology Group 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 Ningbo Deye Technology Group .

The Trend Of ROCE

When we looked at the ROCE trend at Ningbo Deye Technology Group, we didn't gain much confidence. Historically returns on capital were even higher at 41%, but they have dropped over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Ningbo Deye Technology Group has decreased its current liabilities to 41% 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. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Ningbo Deye Technology Group's ROCE

To conclude, we've found that Ningbo Deye Technology Group is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 110% gain to shareholders who have held over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Ningbo Deye Technology Group, we've spotted 3 warning signs, and 1 of them is potentially serious.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.

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