Capital Allocation Trends At Hangzhou DPtech TechnologiesLtd (SZSE:300768) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Hangzhou DPtech TechnologiesLtd (SZSE:300768), we don't think it's current trends fit the mold of a multi-bagger.

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 Hangzhou DPtech TechnologiesLtd is:

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

0.0061 = CN¥20m ÷ (CN¥3.6b - CN¥399m) (Based on the trailing twelve months to September 2023).

Therefore, Hangzhou DPtech TechnologiesLtd has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Software industry average of 2.7%.

See our latest analysis for Hangzhou DPtech TechnologiesLtd

Above you can see how the current ROCE for Hangzhou DPtech TechnologiesLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou DPtech TechnologiesLtd .

What Can We Tell From Hangzhou DPtech TechnologiesLtd's ROCE Trend?

On the surface, the trend of ROCE at Hangzhou DPtech TechnologiesLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.6% from 19% five years ago. 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, Hangzhou DPtech TechnologiesLtd has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Hangzhou DPtech TechnologiesLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hangzhou DPtech TechnologiesLtd. These growth trends haven't led to growth returns though, since the stock has fallen 46% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Hangzhou DPtech TechnologiesLtd that we think you should be aware of.

While Hangzhou DPtech TechnologiesLtd 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.