SF DiamondLtd (SZSE:300179) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at SF DiamondLtd (SZSE:300179) 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?

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 SF DiamondLtd:

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

0.044 = CN¥70m ÷ (CN¥1.9b - CN¥313m) (Based on the trailing twelve months to September 2024).

Therefore, SF DiamondLtd has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.2%.

Check out our latest analysis for SF DiamondLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for SF DiamondLtd's ROCE against it's prior returns. If you're interested in investigating SF DiamondLtd's past further, check out this free graph covering SF DiamondLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at SF DiamondLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.4% from 12% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Key Takeaway

To conclude, we've found that SF DiamondLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 98% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 2 warning signs we've spotted with SF DiamondLtd (including 1 which shouldn't be ignored) .

While SF DiamondLtd 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.