Dnake (Xiamen) Intelligent Technology (SZSE:300884) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 Dnake (Xiamen) Intelligent Technology (SZSE:300884) 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. Analysts use this formula to calculate it for Dnake (Xiamen) Intelligent Technology:

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

0.042 = CN¥58m ÷ (CN¥1.9b - CN¥502m) (Based on the trailing twelve months to September 2023).

Therefore, Dnake (Xiamen) Intelligent Technology has an ROCE of 4.2%. Even though it's in line with the industry average of 4.3%, it's still a low return by itself.

See our latest analysis for Dnake (Xiamen) Intelligent Technology

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

What Can We Tell From Dnake (Xiamen) Intelligent Technology's ROCE Trend?

In terms of Dnake (Xiamen) Intelligent Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% over the last five years. However it looks like Dnake (Xiamen) Intelligent Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 related note, Dnake (Xiamen) Intelligent Technology has decreased its current liabilities to 27% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Dnake (Xiamen) Intelligent Technology's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 58% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 4 warning signs with Dnake (Xiamen) Intelligent Technology (at least 1 which can't be ignored) , and understanding these would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.