There Are Reasons To Feel Uneasy About Sichuan Dawn Precision TechnologyLtd's (SZSE:300780) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 briefly looking over the numbers, we don't think Sichuan Dawn Precision TechnologyLtd (SZSE:300780) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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).

Therefore, 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 5.2%.

See our latest analysis for Sichuan Dawn Precision TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Dawn Precision TechnologyLtd's ROCE against it's prior returns. 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.

How Are Returns Trending?

When we looked at the ROCE trend at Sichuan Dawn Precision TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.4% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Sichuan Dawn Precision TechnologyLtd's ROCE

We're a bit apprehensive about Sichuan Dawn Precision TechnologyLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 31% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Sichuan Dawn Precision TechnologyLtd does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.