Can Precious Dragon Technology Holdings (HKG:1861) Keep Up These Impressive Returns?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That's why when we briefly looked at Precious Dragon Technology Holdings' (HKG:1861) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Precious Dragon Technology Holdings is:

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

0.24 = HK$75m ÷ (HK$473m - HK$156m) (Based on the trailing twelve months to June 2020).

So, Precious Dragon Technology Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 11%.

Check out our latest analysis for Precious Dragon Technology 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 Precious Dragon Technology Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

It's hard not to be impressed by Precious Dragon Technology Holdings' returns on capital. Over the past three years, ROCE has remained relatively flat at around 24% and the business has deployed 27% more capital into its operations. Now considering ROCE is an attractive 24%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

What We Can Learn From Precious Dragon Technology Holdings' ROCE

Precious Dragon Technology Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to know some of the risks facing Precious Dragon Technology Holdings we've found 5 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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