What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, Dragon Mining (HKG:1712) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dragon Mining is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = AU$1.4m ÷ (AU$102m - AU$12m) (Based on the trailing twelve months to June 2023).
Thus, Dragon Mining has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Dragon Mining's ROCE against it's prior returns. If you're interested in investigating Dragon Mining's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Dragon Mining's ROCE Trending?
We're delighted to see that Dragon Mining is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 1.5% on its capital. In addition to that, Dragon Mining is employing 108% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Key Takeaway
Overall, Dragon Mining gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 15% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a final note, we've found 1 warning sign for Dragon Mining that we think you should be aware of.
While Dragon Mining isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we're helping make it simple.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.