Capital Allocation Trends At Dencare (Chongqing) Oral Care (SZSE:001328) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Dencare (Chongqing) Oral Care (SZSE:001328) 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 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 Dencare (Chongqing) Oral Care:

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

0.076 = CN¥108m ÷ (CN¥1.9b - CN¥520m) (Based on the trailing twelve months to June 2024).

Therefore, Dencare (Chongqing) Oral Care has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

See our latest analysis for Dencare (Chongqing) Oral Care

Above you can see how the current ROCE for Dencare (Chongqing) Oral Care 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 Dencare (Chongqing) Oral Care for free.

What Can We Tell From Dencare (Chongqing) Oral Care's ROCE Trend?

In terms of Dencare (Chongqing) Oral Care's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 7.6% from 10% four 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Dencare (Chongqing) Oral Care's ROCE

Bringing it all together, while we're somewhat encouraged by Dencare (Chongqing) Oral Care's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last year. Therefore based on the analysis done in this article, we don't think Dencare (Chongqing) Oral Care has the makings of a multi-bagger.

Dencare (Chongqing) Oral Care does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Dencare (Chongqing) Oral Care 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.