Returns On Capital Signal Tricky Times Ahead For Donglai Coating Technology(Shanghai)Co.Ltd (SHSE:688129)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Donglai Coating Technology(Shanghai)Co.Ltd (SHSE:688129), we don't think it's current trends fit the mold of a multi-bagger.

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 Donglai Coating Technology(Shanghai)Co.Ltd:

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

0.076 = CN¥62m ÷ (CN¥1.6b - CN¥754m) (Based on the trailing twelve months to June 2024).

Therefore, Donglai Coating Technology(Shanghai)Co.Ltd has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

See our latest analysis for Donglai Coating Technology(Shanghai)Co.Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Donglai Coating Technology(Shanghai)Co.Ltd's ROCE against it's prior returns. If you'd like to look at how Donglai Coating Technology(Shanghai)Co.Ltd has performed in the past in other metrics, you can view this free graph of Donglai Coating Technology(Shanghai)Co.Ltd's past earnings, revenue and cash flow.

So How Is Donglai Coating Technology(Shanghai)Co.Ltd's ROCE Trending?

When we looked at the ROCE trend at Donglai Coating Technology(Shanghai)Co.Ltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. 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 side note, Donglai Coating Technology(Shanghai)Co.Ltd's current liabilities have increased over the last five years to 48% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.6%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Donglai Coating Technology(Shanghai)Co.Ltd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Donglai Coating Technology(Shanghai)Co.Ltd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 24% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Donglai Coating Technology(Shanghai)Co.Ltd (of which 1 is significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.