Dianguang Explosion-proof TechnologyLtd's (SZSE:002730) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Dianguang Explosion-proof TechnologyLtd (SZSE:002730) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.088 = CN¥136m ÷ (CN¥2.4b - CN¥840m) (Based on the trailing twelve months to December 2023).

Therefore, Dianguang Explosion-proof TechnologyLtd has an ROCE of 8.8%. On its own that's a low return, but compared to the average of 6.5% generated by the Electrical industry, it's much better.

Check out our latest analysis for Dianguang Explosion-proof TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Dianguang Explosion-proof TechnologyLtd's past further, check out this free graph covering Dianguang Explosion-proof TechnologyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Dianguang Explosion-proof TechnologyLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.8% for the last five years, and the capital employed within the business has risen 58% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Dianguang Explosion-proof TechnologyLtd's ROCE

As we've seen above, Dianguang Explosion-proof TechnologyLtd's returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 24% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Dianguang Explosion-proof TechnologyLtd you'll probably want to know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.