Capital Allocation Trends At Dongguan Dingtong Precision Metal (SHSE:688668) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. 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 Dongguan Dingtong Precision Metal (SHSE:688668), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Dongguan Dingtong Precision Metal is:

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

0.038 = CN¥72m ÷ (CN¥2.1b - CN¥208m) (Based on the trailing twelve months to September 2024).

So, Dongguan Dingtong Precision Metal has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

Check out our latest analysis for Dongguan Dingtong Precision Metal

Above you can see how the current ROCE for Dongguan Dingtong Precision Metal compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Dongguan Dingtong Precision Metal .

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 20% five years ago, while capital employed has grown 535%. That being said, Dongguan Dingtong Precision Metal raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Dongguan Dingtong Precision Metal's earnings and if they change as a result from the capital raise.

The Bottom Line On Dongguan Dingtong Precision Metal's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Dongguan Dingtong Precision Metal. And the stock has followed suit returning a meaningful 34% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 2 warning signs for Dongguan Dingtong Precision Metal (1 shouldn't be ignored) you should be aware of.

While Dongguan Dingtong Precision Metal 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.