Returns Are Gaining Momentum At Daphne International Holdings (HKG:210)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Daphne International Holdings (HKG:210) and its trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Daphne International Holdings:

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

0.054 = HK$40m ÷ (HK$835m - HK$104m) (Based on the trailing twelve months to June 2022).

Therefore, Daphne International Holdings has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

View our latest analysis for Daphne International Holdings

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'd like to look at how Daphne International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Like most people, we're pleased that Daphne International Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 5.4% which is no doubt a relief for some early shareholders. In regards to capital employed, Daphne International Holdings is using 79% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Daphne International Holdings could be selling under-performing assets since the ROCE is improving.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

The Key Takeaway

In a nutshell, we're pleased to see that Daphne International Holdings has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 75% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know about the risks facing Daphne International Holdings, we've discovered 2 warning signs that you should be aware of.

While Daphne International Holdings 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.