Capital Allocation Trends At Beijing Dinghan Technology GroupLtd (SZSE:300011) Aren't Ideal

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Beijing Dinghan Technology GroupLtd (SZSE:300011), we weren't too upbeat about how things were going.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Beijing Dinghan Technology GroupLtd, this is the formula:

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

0.047 = CN¥74m ÷ (CN¥3.8b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

So, Beijing Dinghan Technology GroupLtd has an ROCE of 4.7%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.7%.

View our latest analysis for Beijing Dinghan Technology GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Dinghan Technology GroupLtd's ROCE against it's prior returns. If you'd like to look at how Beijing Dinghan Technology GroupLtd has performed in the past in other metrics, you can view this free graph of Beijing Dinghan Technology GroupLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We aren't inspired by the trend, given ROCE has reduced by 35% over the last five years and Beijing Dinghan Technology GroupLtd is applying -31% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).

On a side note, Beijing Dinghan Technology GroupLtd's current liabilities have increased over the last five years to 59% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.7%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Beijing Dinghan Technology GroupLtd's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Despite the concerning underlying trends, the stock has actually gained 35% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Beijing Dinghan Technology GroupLtd does have some risks, we noticed 3 warning signs (and 2 which can't be ignored) we think you should know about.

While Beijing Dinghan Technology GroupLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.