The Trend Of High Returns At Precious Dragon Technology Holdings (HKG:1861) Has Us Very Interested

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of Precious Dragon Technology Holdings (HKG:1861) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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)

0.20 = HK$71m ÷ (HK$480m - HK$134m) (Based on the trailing twelve months to June 2023).

Therefore, Precious Dragon Technology Holdings has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.

Check out our latest analysis for Precious Dragon Technology Holdings

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 want to delve into the historical earnings, revenue and cash flow of Precious Dragon Technology Holdings, check out these free graphs here.

So How Is Precious Dragon Technology Holdings' ROCE Trending?

Precious Dragon Technology Holdings' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 22% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Key Takeaway

In summary, we're delighted to see that Precious Dragon Technology Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 4.2% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Precious Dragon Technology Holdings does have some risks, we noticed 3 warning signs (and 2 which can't be ignored) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.