Should You Be Impressed By Dalipal Holdings' (HKG:1921) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Dalipal Holdings' (HKG:1921) trend of ROCE, we 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. To calculate this metric for Dalipal Holdings, this is the formula:

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

0.15 = CN¥329m ÷ (CN¥3.7b - CN¥1.4b) (Based on the trailing twelve months to June 2020).

So, Dalipal Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 11% it's much better.

Check out our latest analysis for Dalipal Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dalipal Holdings' ROCE against it's prior returns. If you'd like to look at how Dalipal Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Dalipal Holdings' ROCE Trend?

While the returns on capital are good, they haven't moved much. Over the past three years, ROCE has remained relatively flat at around 15% and the business has deployed 103% more capital into its operations. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last three years, the reduction in current liabilities to 39% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Dalipal Holdings' ROCE

In the end, Dalipal Holdings has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 24% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One final note, you should learn about the 2 warning signs we've spotted with Dalipal Holdings (including 1 which is is potentially serious) .

While Dalipal Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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