To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 investigating Dongguan Dingtong Precision Metal (SHSE:688668), we don't think it's current trends fit the mold of a multi-bagger.
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 Dongguan Dingtong Precision Metal:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = CN¥59m ÷ (CN¥1.9b - CN¥152m) (Based on the trailing twelve months to September 2023).
Therefore, Dongguan Dingtong Precision Metal has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.3%.
Check out our latest analysis for Dongguan Dingtong Precision Metal
Above you can see how the current ROCE for Dongguan Dingtong Precision Metal compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Dongguan Dingtong Precision Metal doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a related note, Dongguan Dingtong Precision Metal has decreased its current liabilities to 7.8% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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
We're a bit apprehensive about Dongguan Dingtong Precision Metal because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One final note, you should learn about the 5 warning signs we've spotted with Dongguan Dingtong Precision Metal (including 2 which are a bit concerning) .
While Dongguan Dingtong Precision Metal 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.
