Diwang Industrial Holdings (HKG:1950) Looks To Prolong Its Impressive Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Diwang Industrial Holdings' (HKG:1950) trend of ROCE, we really liked what we saw.

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 Diwang Industrial Holdings is:

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

0.26 = CN¥101m ÷ (CN¥500m - CN¥107m) (Based on the trailing twelve months to June 2023).

So, Diwang Industrial Holdings has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 9.3%.

Check out our latest analysis for Diwang Industrial 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Diwang Industrial Holdings.

What Can We Tell From Diwang Industrial Holdings' ROCE Trend?

It's hard not to be impressed by Diwang Industrial Holdings' returns on capital. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 185% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

In short, we'd argue Diwang Industrial Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Despite these impressive fundamentals, the stock has collapsed 88% over the last three years, so there is likely other factors affecting the company's future prospects. In any case, we like the underlying trends and would look further into this stock.

If you want to know some of the risks facing Diwang Industrial Holdings we've found 3 warning signs (2 can't be ignored!) 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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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.