Capital Allocation Trends At Dianguang Explosion-proof TechnologyLtd (SZSE:002730) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Dianguang Explosion-proof TechnologyLtd (SZSE:002730), 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. Analysts use this formula to calculate it for Dianguang Explosion-proof TechnologyLtd:

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

0.057 = CN¥100m ÷ (CN¥2.6b - CN¥847m) (Based on the trailing twelve months to September 2024).

Thus, Dianguang Explosion-proof TechnologyLtd has an ROCE of 5.7%. Even though it's in line with the industry average of 5.8%, it's still a low return by itself.

View our latest analysis for Dianguang Explosion-proof TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dianguang Explosion-proof TechnologyLtd'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 Dianguang Explosion-proof TechnologyLtd.

What Can We Tell From Dianguang Explosion-proof TechnologyLtd's ROCE Trend?

In terms of Dianguang Explosion-proof TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.7% from 10% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Our Take On Dianguang Explosion-proof TechnologyLtd's ROCE

In summary, Dianguang Explosion-proof TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 102% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 3 warning signs with Dianguang Explosion-proof TechnologyLtd (at least 1 which is concerning) , and understanding them would certainly be useful.

While Dianguang Explosion-proof TechnologyLtd 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.