Hangzhou DPtech TechnologiesLtd (SZSE:300768) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 briefly looking over the numbers, we don't think Hangzhou DPtech TechnologiesLtd (SZSE:300768) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hangzhou DPtech TechnologiesLtd, this is the formula:

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

0.025 = CN¥82m ÷ (CN¥3.7b - CN¥462m) (Based on the trailing twelve months to June 2024).

So, Hangzhou DPtech TechnologiesLtd has an ROCE of 2.5%. Even though it's in line with the industry average of 3.0%, it's still a low return by itself.

Check out our latest analysis for Hangzhou DPtech TechnologiesLtd

In the above chart we have measured Hangzhou DPtech TechnologiesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hangzhou DPtech TechnologiesLtd for free.

So How Is Hangzhou DPtech TechnologiesLtd's ROCE Trending?

In terms of Hangzhou DPtech TechnologiesLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 2.5%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On 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. And there could be an opportunity here if other metrics look good too, because the stock has declined 56% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you're still interested in Hangzhou DPtech TechnologiesLtd it's worth checking out our FREE intrinsic value approximation for 300768 to see if it's trading at an attractive price in other respects.

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.