Returns On Capital At CETC Digital TechnologyLtd (SHSE:600850) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over CETC Digital TechnologyLtd's (SHSE:600850) trend of ROCE, we liked what we saw.

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. Analysts use this formula to calculate it for CETC Digital TechnologyLtd:

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

0.11 = CN¥560m ÷ (CN¥10b - CN¥5.2b) (Based on the trailing twelve months to September 2024).

Thus, CETC Digital TechnologyLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 3.7% generated by the IT industry.

See our latest analysis for CETC Digital TechnologyLtd

In the above chart we have measured CETC Digital TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CETC Digital TechnologyLtd .

So How Is CETC Digital TechnologyLtd's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 93% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another thing to note, CETC Digital TechnologyLtd has a high ratio of current liabilities to total assets of 50%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In the end, CETC Digital TechnologyLtd has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 29% over the last five years for shareholders who have owned the stock in this period. So to determine if CETC Digital TechnologyLtd is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a final note, we've found 1 warning sign for CETC Digital TechnologyLtd that we think you should be aware of.

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.