Can Da Ming International Holdings (HKG:1090) Continue To Grow Its Returns On Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Da Ming International Holdings (HKG:1090) and its trend of ROCE, we really liked what we saw.

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 Da Ming International Holdings:

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

0.13 = CN¥488m ÷ (CN¥12b - CN¥7.8b) (Based on the trailing twelve months to June 2020).

So, Da Ming International Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Metals and Mining industry.

View our latest analysis for Da Ming International Holdings

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

What Can We Tell From Da Ming International Holdings' ROCE Trend?

The trends we've noticed at Da Ming International Holdings are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. So we're very much inspired by what we're seeing at Da Ming International Holdings thanks to its ability to profitably reinvest capital.

On a side note, Da Ming International Holdings' current liabilities are still rather high at 67% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

All in all, it's terrific to see that Da Ming International Holdings 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 14% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Da Ming International Holdings (of which 1 is significant!) that you should know about.

While Da Ming International 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.

When trading Da Ming International Holdings or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.