Investors Could Be Concerned With DL Holdings Group's (HKG:1709) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So while DL Holdings Group (HKG:1709) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for DL Holdings Group, this is the formula:

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

0.27 = HK$137m ÷ (HK$628m - HK$116m) (Based on the trailing twelve months to March 2021).

Therefore, DL Holdings Group has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Luxury industry average of 6.9%.

View our latest analysis for DL Holdings Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of DL Holdings Group, check out these free graphs here.

So How Is DL Holdings Group's ROCE Trending?

We weren't thrilled with the trend because DL Holdings Group's ROCE has reduced by 53% over the last five years, while the business employed 1,299% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with DL Holdings Group's earnings and if they change as a result from the capital raise.

On a side note, DL Holdings Group has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On DL Holdings Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that DL Holdings Group is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 52% over the last five years, 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.

On a separate note, we've found 4 warning signs for DL Holdings Group you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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