There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Dalian Demaishi Precision Technology (SZSE:301007), it didn't seem to tick all of these boxes.

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

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 Dalian Demaishi Precision Technology:

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

0.082 = CN¥57m ÷ (CN¥1.0b - CN¥329m) (Based on the trailing twelve months to March 2024).

So, Dalian Demaishi Precision Technology has an ROCE of 8.2%. On its own, that's a low figure but it's around the 6.9% average generated by the Auto Components industry.

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

What Does the ROCE Trend For Dalian Demaishi Precision Technology Tell Us?

We weren't thrilled with the trend because Dalian Demaishi Precision Technology's ROCE has reduced by 42% over the last five years, while the business employed 99% more capital. Usually this isn't ideal, but given Dalian Demaishi Precision Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Dalian Demaishi Precision Technology's earnings and if they change as a result from the capital raise.

The Bottom Line On Dalian Demaishi Precision Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Dalian Demaishi Precision Technology. And there could be an opportunity here if other metrics look good too, because the stock has declined 20% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 2 warning signs facing Dalian Demaishi Precision Technology that you might find interesting.

While Dalian Demaishi Precision 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com