Hubei DOTI Micro Technology (SZSE:301183) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Hubei DOTI Micro Technology (SZSE:301183) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hubei DOTI Micro Technology is:

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

0.011 = CN¥9.1m ÷ (CN¥1.2b - CN¥366m) (Based on the trailing twelve months to September 2024).

Thus, Hubei DOTI Micro Technology has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

View our latest analysis for Hubei DOTI Micro Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hubei DOTI Micro Technology's ROCE against it's prior returns. If you'd like to look at how Hubei DOTI Micro Technology has performed in the past in other metrics, you can view this free graph of Hubei DOTI Micro Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Hubei DOTI Micro Technology doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 1.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Hubei DOTI Micro Technology has done well to pay down its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Hubei DOTI Micro Technology is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 3.3% gain to shareholders who've held over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we've found 3 warning signs for Hubei DOTI Micro Technology that we think 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.

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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.