Returns On Capital Are Showing Encouraging Signs At China Daye Non-Ferrous Metals Mining (HKG:661)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at China Daye Non-Ferrous Metals Mining (HKG:661) so let's look a bit deeper.

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. Analysts use this formula to calculate it for China Daye Non-Ferrous Metals Mining:

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

0.097 = CN¥858m ÷ (CN¥17b - CN¥8.0b) (Based on the trailing twelve months to June 2021).

Therefore, China Daye Non-Ferrous Metals Mining has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.

See our latest analysis for China Daye Non-Ferrous Metals Mining

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Daye Non-Ferrous Metals Mining's ROCE against it's prior returns. If you're interested in investigating China Daye Non-Ferrous Metals Mining's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China Daye Non-Ferrous Metals Mining Tell Us?

We're delighted to see that China Daye Non-Ferrous Metals Mining is reaping rewards from its investments and has now broken into profitability. The company now earns 9.7% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by China Daye Non-Ferrous Metals Mining has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Another thing to note, China Daye Non-Ferrous Metals Mining has a high ratio of current liabilities to total assets of 47%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To bring it all together, China Daye Non-Ferrous Metals Mining has done well to increase the returns it's generating from its capital employed. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching China Daye Non-Ferrous Metals Mining, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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