Returns On Capital Are A Standout For Dadi International Group (HKG:8130)

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. And in light of that, the trends we're seeing at Dadi International Group's (HKG:8130) look very promising so lets take a look.

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. The formula for this calculation on Dadi International Group is:

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

0.28 = HK$147m ÷ (HK$1.2b - HK$710m) (Based on the trailing twelve months to December 2020).

So, Dadi International Group has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Media industry average of 6.9%.

View our latest analysis for Dadi International Group

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'd like to look at how Dadi International Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Dadi International Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 28% which is a sight for sore eyes. Not only that, but the company is utilizing 115% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 58% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Dadi International Group's ROCE

To the delight of most shareholders, Dadi International Group has now broken into profitability. However the stock is down a substantial 79% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Dadi International Group does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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