Dajin Heavy IndustryLtd's (SZSE:002487) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Dajin Heavy IndustryLtd's (SZSE:002487) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Dajin Heavy IndustryLtd:

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

0.077 = CN¥554m ÷ (CN¥10b - CN¥2.8b) (Based on the trailing twelve months to September 2023).

So, Dajin Heavy IndustryLtd has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 6.3% generated by the Electrical industry, it's much better.

Check out our latest analysis for Dajin Heavy IndustryLtd

Above you can see how the current ROCE for Dajin Heavy IndustryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Dajin Heavy IndustryLtd .

What Can We Tell From Dajin Heavy IndustryLtd's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 253% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Dajin Heavy IndustryLtd's ROCE

All in all, it's terrific to see that Dajin Heavy IndustryLtd is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Dajin Heavy IndustryLtd does have some risks though, and we've spotted 1 warning sign for Dajin Heavy IndustryLtd 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.