Slowing Rates Of Return At Dirui IndustrialLtd (SZSE:300396) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Dirui IndustrialLtd's (SZSE:300396) trend of ROCE, we liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Dirui IndustrialLtd:

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

0.14 = CN¥301m ÷ (CN¥3.3b - CN¥1.0b) (Based on the trailing twelve months to March 2024).

So, Dirui IndustrialLtd has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Medical Equipment industry.

Check out our latest analysis for Dirui IndustrialLtd

Above you can see how the current ROCE for Dirui IndustrialLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dirui IndustrialLtd for free.

What Does the ROCE Trend For Dirui IndustrialLtd Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 32% in that time. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 32% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 32% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Key Takeaway

To sum it up, Dirui IndustrialLtd has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 29% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Dirui IndustrialLtd is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Like most companies, Dirui IndustrialLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Dirui IndustrialLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com