Dongguan Development (Holdings) (SZSE:000828) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Dongguan Development (Holdings) (SZSE:000828) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Dongguan Development (Holdings):

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

0.07 = CN¥1.0b ÷ (CN¥20b - CN¥5.7b) (Based on the trailing twelve months to March 2024).

Therefore, Dongguan Development (Holdings) has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.3% generated by the Infrastructure industry, it's much better.

See our latest analysis for Dongguan Development (Holdings)

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

The Trend Of ROCE

On the surface, the trend of ROCE at Dongguan Development (Holdings) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.0% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Key Takeaway

In summary, Dongguan Development (Holdings) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 13% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Dongguan Development (Holdings) does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are potentially serious...

While Dongguan Development (Holdings) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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