If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. 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?

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. To calculate this metric for Dalian Demaishi Precision Technology, this is the formula:

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

0.076 = CN¥53m ÷ (CN¥1.0b - CN¥334m) (Based on the trailing twelve months to September 2024).

Therefore, Dalian Demaishi Precision Technology has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Auto Components industry average of 7.0%.

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're interested in investigating Dalian Demaishi Precision Technology's past further, check out this free graph covering Dalian Demaishi Precision Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Dalian Demaishi Precision Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. 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 related note, Dalian Demaishi Precision Technology has decreased its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Dalian Demaishi Precision Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Dalian Demaishi Precision Technology is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last three 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 about the risks facing Dalian Demaishi Precision Technology, we've discovered 1 warning sign that you should be aware of.

While Dalian Demaishi Precision Technology 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.