What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Hangzhou DPtech TechnologiesLtd (SZSE:300768), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Hangzhou DPtech TechnologiesLtd is:

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

0.0061 = CN¥20m ÷ (CN¥3.6b - CN¥399m) (Based on the trailing twelve months to September 2023).

Therefore, Hangzhou DPtech TechnologiesLtd has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Software industry average of 2.7%.

In the above chart we have measured Hangzhou DPtech TechnologiesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou DPtech TechnologiesLtd .

What Does the ROCE Trend For Hangzhou DPtech TechnologiesLtd Tell Us?

When we looked at the ROCE trend at Hangzhou DPtech TechnologiesLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.6% from 19% five years ago. 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 related note, Hangzhou DPtech TechnologiesLtd has decreased its current liabilities to 11% 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou DPtech TechnologiesLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 51% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Hangzhou DPtech TechnologiesLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.