Beijing Dahao TechnologyLtd (SHSE:603025) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Beijing Dahao TechnologyLtd's (SHSE:603025) look very promising so lets take a look.

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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. Analysts use this formula to calculate it for Beijing Dahao TechnologyLtd:

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

0.24 = CN¥696m ÷ (CN¥4.3b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

Therefore, Beijing Dahao TechnologyLtd has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 5.8% earned by companies in a similar industry.

View our latest analysis for Beijing Dahao TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Dahao TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Beijing Dahao TechnologyLtd has performed in the past in other metrics, you can view this free graph of Beijing Dahao TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Beijing Dahao TechnologyLtd Tell Us?

Investors would be pleased with what's happening at Beijing Dahao TechnologyLtd. Over the last five years, returns on capital employed have risen substantially to 24%. The amount of capital employed has increased too, by 64%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 33% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

To sum it up, Beijing Dahao TechnologyLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 137% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Beijing Dahao TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

Beijing Dahao TechnologyLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.