Sichuan Dawn Precision TechnologyLtd (SZSE:300780) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Sichuan Dawn Precision TechnologyLtd (SZSE:300780), we don't think it's current trends fit the mold of a multi-bagger.

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 Sichuan Dawn Precision TechnologyLtd, this is the formula:

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

0.024 = CN¥44m ÷ (CN¥2.1b - CN¥214m) (Based on the trailing twelve months to September 2023).

So, Sichuan Dawn Precision TechnologyLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.3%.

View our latest analysis for Sichuan Dawn Precision 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 Sichuan Dawn Precision TechnologyLtd's past further, check out this free graph covering Sichuan Dawn Precision TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Sichuan Dawn Precision TechnologyLtd's ROCE Trend?

In terms of Sichuan Dawn Precision TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Sichuan Dawn Precision TechnologyLtd has done well to pay down its current liabilities to 10% 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.

What We Can Learn From Sichuan Dawn Precision TechnologyLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sichuan Dawn Precision TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 4.9% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Sichuan Dawn Precision TechnologyLtd we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Sichuan Dawn Precision TechnologyLtd 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.