Daphne International Holdings (HKG:210) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Daphne International Holdings (HKG:210) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Daphne International Holdings, this is the formula:

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

0.12 = HK$85m ÷ (HK$837m - HK$97m) (Based on the trailing twelve months to December 2021).

So, Daphne International Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 7.1% it's much better.

See our latest analysis for Daphne International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daphne International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Daphne International Holdings, check out these free graphs here.

What Can We Tell From Daphne International Holdings' ROCE Trend?

Like most people, we're pleased that Daphne International Holdings is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 79%. Daphne International Holdings could be selling under-performing assets since the ROCE is improving.

On a related note, the company's ratio of current liabilities to total assets has decreased to 12%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Daphne International Holdings' ROCE

In summary, it's great to see that Daphne International Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Although the company may be facing some issues elsewhere since the stock has plunged 83% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

Like most companies, Daphne International Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.