Nanjing TDH TechnologyLtd (SZSE:301378) 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Nanjing TDH TechnologyLtd (SZSE:301378) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Nanjing TDH TechnologyLtd is:

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

0.0029 = CN¥4.1m ÷ (CN¥1.6b - CN¥211m) (Based on the trailing twelve months to September 2024).

Thus, Nanjing TDH TechnologyLtd has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.3%.

View our latest analysis for Nanjing TDH TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nanjing TDH TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Nanjing TDH TechnologyLtd's past further, check out this free graph covering Nanjing TDH TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Nanjing TDH TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Nanjing TDH TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.3% from 33% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Nanjing TDH TechnologyLtd has done well to pay down its current liabilities to 13% 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.

In Conclusion...

To conclude, we've found that Nanjing TDH TechnologyLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 82% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 4 warning signs with Nanjing TDH TechnologyLtd (at least 3 which can't be ignored) , and understanding these would certainly be useful.

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.

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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.