Is There More Growth In Store For DaChan Food (Asia)'s (HKG:3999) Returns On Capital?

There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, DaChan Food (Asia) (HKG:3999) looks quite promising in regards to its trends of return on capital.

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. 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)

0.16 = CN¥454m ÷ (CN¥4.3b - CN¥1.5b) (Based on the trailing twelve months to September 2020).

Thus, DaChan Food (Asia) has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Food industry.

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.

What Can We Tell From DaChan Food (Asia)'s ROCE Trend?

Shareholders will be relieved that DaChan Food (Asia) has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 16%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

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. Considering the stock has delivered 10% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 1 warning sign for DaChan Food (Asia) you'll probably want to know about.

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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