Capital Allocation Trends At Dongguan Tarry ElectronicsLtd (SZSE:300976) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Dongguan Tarry ElectronicsLtd (SZSE:300976) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Dongguan Tarry ElectronicsLtd:

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

0.017 = CN¥54m ÷ (CN¥3.7b - CN¥474m) (Based on the trailing twelve months to March 2024).

Therefore, Dongguan Tarry ElectronicsLtd has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

Check out our latest analysis for Dongguan Tarry ElectronicsLtd

Above you can see how the current ROCE for Dongguan Tarry ElectronicsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Dongguan Tarry ElectronicsLtd .

How Are Returns Trending?

In terms of Dongguan Tarry ElectronicsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.7% from 48% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Dongguan Tarry ElectronicsLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Dongguan Tarry ElectronicsLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 37% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Dongguan Tarry ElectronicsLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.