Be Wary Of Guangdong Dtech Technology (SZSE:301377) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Guangdong Dtech Technology (SZSE:301377) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Guangdong Dtech Technology, this is the formula:

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

0.076 = CN¥196m ÷ (CN¥3.3b - CN¥745m) (Based on the trailing twelve months to September 2024).

Thus, Guangdong Dtech Technology has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.2%.

View our latest analysis for Guangdong Dtech Technology

Above you can see how the current ROCE for Guangdong Dtech Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangdong Dtech Technology .

What Can We Tell From Guangdong Dtech Technology's ROCE Trend?

When we looked at the ROCE trend at Guangdong Dtech Technology, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 7.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Guangdong Dtech Technology has decreased its current liabilities to 23% 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.

The Bottom Line

While returns have fallen for Guangdong Dtech Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 12% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Guangdong Dtech Technology does have some risks though, and we've spotted 2 warning signs for Guangdong Dtech Technology that you might be interested in.

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.

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.