Returns On Capital At Dongguan Aohai Technology (SZSE:002993) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Dongguan Aohai Technology (SZSE:002993), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Dongguan Aohai Technology:

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

0.069 = CN¥340m ÷ (CN¥7.3b - CN¥2.3b) (Based on the trailing twelve months to June 2023).

Thus, Dongguan Aohai Technology has an ROCE of 6.9%. On its own that's a low return, but compared to the average of 5.3% generated by the Tech industry, it's much better.

See our latest analysis for Dongguan Aohai Technology

Above you can see how the current ROCE for Dongguan Aohai Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dongguan Aohai Technology for free.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 859%. Usually this isn't ideal, but given Dongguan Aohai Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Dongguan Aohai Technology might not have received a full period of earnings contribution from it.

On a related note, Dongguan Aohai Technology has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Dongguan Aohai Technology's ROCE

To conclude, we've found that Dongguan Aohai Technology is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 24% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Dongguan Aohai Technology, we've discovered 3 warning signs that you should be aware of.

While Dongguan Aohai Technology 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.