If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 briefly looking over the numbers, we don't think Hangzhou DPtech TechnologiesLtd (SZSE:300768) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Hangzhou DPtech TechnologiesLtd is:

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

0.03 = CN¥99m ÷ (CN¥3.7b - CN¥468m) (Based on the trailing twelve months to September 2024).

Thus, Hangzhou DPtech TechnologiesLtd has an ROCE of 3.0%. In absolute terms, that's a low return, but it's much better than the Software industry average of 2.3%.

In the above chart we have measured Hangzhou DPtech TechnologiesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou DPtech TechnologiesLtd .

What Can We Tell From Hangzhou DPtech TechnologiesLtd's ROCE Trend?

When we looked at the ROCE trend at Hangzhou DPtech TechnologiesLtd, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 3.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Hangzhou DPtech TechnologiesLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou DPtech TechnologiesLtd 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 35% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Hangzhou DPtech TechnologiesLtd does have some risks though, and we've spotted 1 warning sign for Hangzhou DPtech TechnologiesLtd that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.