China Dongxiang (Group) (HKG:3818) Is Looking To Continue Growing Its Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, China Dongxiang (Group) (HKG:3818) looks quite promising in regards to its trends of return on capital.

What is 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. The formula for this calculation on China Dongxiang (Group) is:

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

0.087 = CN¥1.0b ÷ (CN¥13b - CN¥822m) (Based on the trailing twelve months to September 2020).

So, China Dongxiang (Group) has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Luxury industry average of 7.4%.

Check out our latest analysis for China Dongxiang (Group)

In the above chart we have measured China Dongxiang (Group)'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 China Dongxiang (Group) here for free.

So How Is China Dongxiang (Group)'s ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. So we're very much inspired by what we're seeing at China Dongxiang (Group) thanks to its ability to profitably reinvest capital.

The Bottom Line On China Dongxiang (Group)'s ROCE

All in all, it's terrific to see that China Dongxiang (Group) is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 18% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One final note, you should learn about the 3 warning signs we've spotted with China Dongxiang (Group) (including 1 which is potentially serious) .

While China Dongxiang (Group) 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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