Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Changsha DIALINE New Material Sci.&Tech (SZSE:300700) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Changsha DIALINE New Material Sci.&Tech, this is the formula:

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

0.16 = CN¥225m ÷ (CN¥2.0b - CN¥599m) (Based on the trailing twelve months to September 2023).

Therefore, Changsha DIALINE New Material Sci.&Tech has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Machinery industry.

Above you can see how the current ROCE for Changsha DIALINE New Material Sci.&Tech 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 analyst report for Changsha DIALINE New Material Sci.&Tech .

What Can We Tell From Changsha DIALINE New Material Sci.&Tech's ROCE Trend?

We weren't thrilled with the trend because Changsha DIALINE New Material Sci.&Tech's ROCE has reduced by 21% over the last five years, while the business employed 136% more capital. That being said, Changsha DIALINE New Material Sci.&Tech raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Changsha DIALINE New Material Sci.&Tech probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

While returns have fallen for Changsha DIALINE New Material Sci.&Tech in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 14% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Changsha DIALINE New Material Sci.&Tech does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Changsha DIALINE New Material Sci.&Tech 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.