DeHua TB New Decoration MaterialLtd (SZSE:002043) Is Aiming To Keep Up Its Impressive Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Ergo, when we looked at the ROCE trends at DeHua TB New Decoration MaterialLtd (SZSE:002043), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on DeHua TB New Decoration MaterialLtd is:

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

0.22 = CN¥696m ÷ (CN¥5.9b - CN¥2.7b) (Based on the trailing twelve months to September 2023).

So, DeHua TB New Decoration MaterialLtd has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Forestry industry average of 3.4%.

Check out our latest analysis for DeHua TB New Decoration MaterialLtd

In the above chart we have measured DeHua TB New Decoration MaterialLtd'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 DeHua TB New Decoration MaterialLtd for free.

What Can We Tell From DeHua TB New Decoration MaterialLtd's ROCE Trend?

We'd be pretty happy with returns on capital like DeHua TB New Decoration MaterialLtd. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 76% in that time. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a separate but related note, it's important to know that DeHua TB New Decoration MaterialLtd has a current liabilities to total assets ratio of 46%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On DeHua TB New Decoration MaterialLtd's ROCE

In summary, we're delighted to see that DeHua TB New Decoration MaterialLtd has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 2 warning signs for DeHua TB New Decoration MaterialLtd you'll probably want to know about.

DeHua TB New Decoration MaterialLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.