Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Shenzhen Tianyuan DIC Information Technology (SZSE:300047) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Shenzhen Tianyuan DIC Information Technology, this is the formula:

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

0.046 = CN¥177m ÷ (CN¥6.9b - CN¥3.1b) (Based on the trailing twelve months to June 2024).

Thus, Shenzhen Tianyuan DIC Information Technology has an ROCE of 4.6%. In absolute terms, that's a low return, but it's much better than the Software industry average of 3.0%.

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

So How Is Shenzhen Tianyuan DIC Information Technology's ROCE Trending?

When we looked at the ROCE trend at Shenzhen Tianyuan DIC Information Technology, we didn't gain much confidence. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 4.6%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Shenzhen Tianyuan DIC Information Technology has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Shenzhen Tianyuan DIC Information Technology's ROCE

While returns have fallen for Shenzhen Tianyuan DIC Information Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 18% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Shenzhen Tianyuan DIC Information Technology, we've spotted 3 warning signs, and 2 of them are a bit concerning.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.