DaChan Food (Asia) (HKG:3999) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at DaChan Food (Asia) (HKG:3999) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for DaChan Food (Asia):

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

0.14 = CN¥385m ÷ (CN¥4.3b - CN¥1.6b) (Based on the trailing twelve months to December 2020).

Therefore, DaChan Food (Asia) has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 13%.

Check out our latest analysis for DaChan Food (Asia)

Historical performance is a great place to start when researching a stock so above you can see the gauge for DaChan Food (Asia)'s ROCE against it's prior returns. If you're interested in investigating DaChan Food (Asia)'s past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

DaChan Food (Asia) is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 392% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

In summary, we're delighted to see that DaChan Food (Asia) has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 1.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

While DaChan Food (Asia) looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 3999 is currently trading for a fair price.

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.

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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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