Returns At Dongfang Electric (HKG:1072) Are On The Way Up

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Dongfang Electric's (HKG:1072) returns on capital, so let's have a look.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dongfang Electric, this is the formula:

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

0.032 = CN¥2.0b ÷ (CN¥165b - CN¥104b) (Based on the trailing twelve months to September 2025).

Therefore, Dongfang Electric has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.1%.

View our latest analysis for Dongfang Electric

In the above chart we have measured Dongfang Electric'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 Dongfang Electric for free.

What Does the ROCE Trend For Dongfang Electric Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.2%. The amount of capital employed has increased too, by 48%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Dongfang Electric has a high ratio of current liabilities to total assets of 63%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Dongfang Electric's ROCE

In summary, it's great to see that Dongfang Electric can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 354% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Dongfang Electric can keep these trends up, it could have a bright future ahead.

Like most companies, Dongfang Electric does come with some risks, and we've found 1 warning sign that you should be aware of.

While Dongfang Electric may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.