Dragon Mining's (HKG:1712) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

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 Dragon Mining, this is the formula:

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).

Therefore, Dragon Mining has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.2%.

See our latest analysis for Dragon Mining

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'd like to look at how Dragon Mining has performed in the past in other metrics, you can view this free graph of Dragon Mining's 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. And unsurprisingly, like most companies trying to break into the black, Dragon Mining is utilizing 108% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Dragon Mining's ROCE

In summary, it's great to see that Dragon Mining has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 46% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Dragon Mining, we've discovered 1 warning sign that you should be aware of.

While Dragon Mining may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.