Precious Dragon Technology Holdings (HKG:1861) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Precious Dragon Technology Holdings (HKG:1861), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Precious Dragon Technology Holdings is:

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

0.097 = HK$37m ÷ (HK$548m - HK$162m) (Based on the trailing twelve months to June 2022).

Therefore, Precious Dragon Technology Holdings has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Chemicals industry average of 12%.

Check out the opportunities and risks within the HK Chemicals industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Precious Dragon Technology Holdings' ROCE against it's prior returns. If you'd like to look at how Precious Dragon Technology Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Precious Dragon Technology Holdings' ROCE Trending?

In terms of Precious Dragon Technology Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 9.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Precious Dragon Technology Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 11% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Precious Dragon Technology Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While Precious Dragon Technology 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. 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.