Why You Should Care About Diwang Industrial Holdings' (HKG:1950) Strong Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That's why when we briefly looked at Diwang Industrial Holdings' (HKG:1950) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Diwang Industrial Holdings:

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%. 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 Diwang Industrial Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Diwang Industrial Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Diwang Industrial Holdings, check out these free graphs here.

What Does the ROCE Trend For Diwang Industrial Holdings Tell Us?

Diwang Industrial Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 185% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Diwang Industrial Holdings can keep this up, we'd be very optimistic about its future.

The Key Takeaway

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. What's surprising though is that the stock has collapsed 80% over the last three years, so there might be other areas of the business hurting its prospects. So in light of that'd we think it's worthwhile looking further into this stock to see if there's any areas for concern.

One more thing: We've identified 4 warning signs with Diwang Industrial Holdings (at least 2 which can't be ignored) , and understanding them would certainly be useful.

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.