We Like These Underlying Return On Capital Trends At Da Yu Financial Holdings (HKG:1073)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Da Yu Financial Holdings (HKG:1073) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Da Yu Financial Holdings:

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

0.13 = HK$63m ÷ (HK$515m - HK$37m) (Based on the trailing twelve months to December 2020).

Thus, Da Yu Financial Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 3.9% generated by the Trade Distributors industry.

Check out our latest analysis for Da Yu Financial Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Da Yu Financial Holdings' ROCE against it's prior returns. If you're interested in investigating Da Yu Financial Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Da Yu Financial Holdings' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 38% over the last one year. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

In summary, we're delighted to see that Da Yu Financial Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 1.6% to shareholders over the last year, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Da Yu Financial Holdings does have some risks though, and we've spotted 2 warning signs for Da Yu Financial Holdings 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. 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.
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