What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after investigating Darbond Technology (SHSE:688035), we don’t think it’s current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Darbond Technology is:

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

0.04 = CN¥93m ÷ (CN¥2.6b – CN¥234m) (Based on the trailing twelve months to September 2023).

So, Darbond Technology has an ROCE of 4.0%. Ultimately, that’s a low return and it under-performs the Chemicals industry average of 5.6%.

Check out our latest analysis for Darbond Technology

In the above chart we have measured Darbond Technology’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Darbond Technology for free.

What Can We Tell From Darbond Technology’s ROCE Trend?

When we looked at the ROCE trend at Darbond Technology, we didn’t gain much confidence. Over the last four years, returns on capital have decreased to 4.0% from 7.0% four years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Darbond Technology has decreased its current liabilities to 9.1% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Darbond Technology’s ROCE

While returns have fallen for Darbond Technology in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 44% over the last year, so there might be an opportunity here for astute investors. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We’ve identified 2 warning signs with Darbond Technology (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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.