Dnake (Xiamen) Intelligent Technology (SZSE:300884) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Dnake (Xiamen) Intelligent Technology (SZSE:300884), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Dnake (Xiamen) Intelligent Technology:

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

0.023 = CN¥29m ÷ (CN¥1.7b - CN¥434m) (Based on the trailing twelve months to September 2024).

Thus, Dnake (Xiamen) Intelligent Technology has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.1%.

Check out our latest analysis for Dnake (Xiamen) Intelligent Technology

Above you can see how the current ROCE for Dnake (Xiamen) Intelligent 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 Dnake (Xiamen) Intelligent Technology for free.

What The Trend Of ROCE Can Tell Us

In terms of Dnake (Xiamen) Intelligent Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 35% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Dnake (Xiamen) Intelligent Technology has done well to pay down its current liabilities to 25% 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.

The Bottom Line On Dnake (Xiamen) Intelligent Technology's ROCE

We're a bit apprehensive about Dnake (Xiamen) Intelligent Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 0.1% over the last three years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Dnake (Xiamen) Intelligent Technology does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Dnake (Xiamen) Intelligent 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.