There's Been No Shortage Of Growth Recently For DongHua Testing Technology's (SZSE:300354) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at DongHua Testing Technology (SZSE:300354) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for DongHua Testing Technology:

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

0.17 = CN¥116m ÷ (CN¥759m - CN¥61m) (Based on the trailing twelve months to March 2024).

Thus, DongHua Testing Technology has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Electronic industry.

Check out our latest analysis for DongHua Testing Technology

Above you can see how the current ROCE for DongHua Testing Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for DongHua Testing Technology .

What Does the ROCE Trend For DongHua Testing Technology Tell Us?

The trends we've noticed at DongHua Testing Technology are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 91%. So we're very much inspired by what we're seeing at DongHua Testing Technology thanks to its ability to profitably reinvest capital.

What We Can Learn From DongHua Testing Technology's ROCE

All in all, it's terrific to see that DongHua Testing Technology is reaping the rewards from prior investments and is growing its capital base. And a remarkable 305% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if DongHua Testing Technology can keep these trends up, it could have a bright future ahead.

Like most companies, DongHua Testing Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.