The Returns At Dalipal Holdings (HKG:1921) Provide Us With Signs Of What's To Come

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, the ROCE of Dalipal Holdings (HKG:1921) looks decent, right now, so lets see what the trend of returns can tell us.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Dalipal Holdings is:

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 9.1% it's much better.

View our latest analysis for Dalipal 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 want to delve into the historical earnings, revenue and cash flow of Dalipal Holdings, check out these free graphs here.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 15% for the last three years, and the capital employed within the business has risen 103% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Dalipal Holdings has consistently earned this amount. 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.

What We Can Learn From Dalipal Holdings' ROCE

The main thing to remember is that Dalipal Holdings has proven its ability to continually reinvest at respectable rates of return. Yet over the last year the stock has declined 10%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a final note, we found 2 warning signs for Dalipal Holdings (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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