Shenzhen Tianyuan DIC Information Technology (SZSE:300047) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Shenzhen Tianyuan DIC Information Technology (SZSE:300047) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Shenzhen Tianyuan DIC Information Technology is:

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

0.046 = CN¥174m ÷ (CN¥6.9b - CN¥3.1b) (Based on the trailing twelve months to June 2024).

Thus, Shenzhen Tianyuan DIC Information Technology has an ROCE of 4.6%. In absolute terms, that's a low return, but it's much better than the Software industry average of 2.8%.

Check out our latest analysis for Shenzhen Tianyuan DIC Information Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Shenzhen Tianyuan DIC Information Technology's past further, check out this free graph covering Shenzhen Tianyuan DIC Information Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Shenzhen Tianyuan DIC Information Technology Tell Us?

In terms of Shenzhen Tianyuan DIC Information Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.6% from 9.3% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shenzhen Tianyuan DIC Information Technology's current liabilities are still rather high at 45% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shenzhen Tianyuan DIC Information Technology's ROCE

While returns have fallen for Shenzhen Tianyuan DIC Information Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 91% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Shenzhen Tianyuan DIC Information Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are significant...

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.

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.