What are the early trends we should look for to identify a stock that could 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. 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 Dareway SoftwareLtd (SHSE:688579) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Dareway SoftwareLtd is:

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

0.043 = CN¥61m ÷ (CN¥1.7b - CN¥306m) (Based on the trailing twelve months to March 2024).

Therefore, Dareway SoftwareLtd has an ROCE of 4.3%. On its own that's a low return, but compared to the average of 3.1% generated by the Software industry, it's much better.

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

How Are Returns Trending?

In terms of Dareway SoftwareLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.3% from 10% five years ago. However it looks like Dareway SoftwareLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

In Conclusion...

To conclude, we've found that Dareway SoftwareLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 38% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Dareway SoftwareLtd and understanding this should be part of your investment process.

While Dareway SoftwareLtd 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.