Newland Digital TechnologyLtd (SZSE:000997) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Newland Digital TechnologyLtd (SZSE:000997) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Newland Digital TechnologyLtd, this is the formula:

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

0.19 = CN¥1.2b ÷ (CN¥12b - CN¥5.8b) (Based on the trailing twelve months to September 2023).

Therefore, Newland Digital TechnologyLtd has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 2.7% it's much better.

Check out our latest analysis for Newland Digital TechnologyLtd

Above you can see how the current ROCE for Newland Digital TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Newland Digital TechnologyLtd .

So How Is Newland Digital TechnologyLtd's ROCE Trending?

The trends we've noticed at Newland Digital TechnologyLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 21%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Newland Digital TechnologyLtd's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, Newland Digital TechnologyLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 12% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

If you'd like to know about the risks facing Newland Digital TechnologyLtd, we've discovered 3 warning signs that you should be aware of.

While Newland Digital TechnologyLtd 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.

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.