Capital Allocation Trends At Shenzhen Desay Battery Technology (SZSE:000049) Aren't Ideal

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shenzhen Desay Battery Technology (SZSE:000049) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Shenzhen Desay Battery Technology, this is the formula:

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

0.048 = CN¥474m ÷ (CN¥16b - CN¥6.3b) (Based on the trailing twelve months to March 2024).

So, Shenzhen Desay Battery Technology has an ROCE of 4.8%. On its own, that's a low figure but it's around the 6.0% average generated by the Electrical industry.

Check out our latest analysis for Shenzhen Desay Battery Technology

In the above chart we have measured Shenzhen Desay Battery Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shenzhen Desay Battery Technology .

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 29% five years ago, while capital employed has grown 262%. That being said, Shenzhen Desay Battery Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shenzhen Desay Battery Technology might not have received a full period of earnings contribution from it.

On a side note, Shenzhen Desay Battery Technology has done well to pay down its current liabilities to 39% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Shenzhen Desay Battery Technology's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 5.1% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Shenzhen Desay Battery Technology does have some risks though, and we've spotted 3 warning signs for Shenzhen Desay Battery Technology that you might be interested in.

While Shenzhen Desay Battery 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.