What Do The Returns At Da Ming International Holdings (HKG:1090) Mean Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Da Ming International Holdings (HKG:1090) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Da Ming International Holdings, this is the formula:

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 7.5% generated by the Metals and Mining industry.

Check out our latest analysis for Da Ming International 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're interested in investigating Da Ming International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Da Ming International Holdings Tell Us?

We like the trends that we're seeing from Da Ming International Holdings. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 49%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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.

Our Take On Da Ming International Holdings' ROCE

In summary, it's great to see that Da Ming International Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 8.7% 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.

If you'd like to know more about Da Ming International Holdings, we've spotted 2 warning signs, and 1 of them is significant.

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.

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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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