DTXS Silk Road Investment Holdings (HKG:620) Is Doing The Right Things To Multiply Its Share Price

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in DTXS Silk Road Investment Holdings' (HKG:620) returns on capital, so let's have a look.

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. To calculate this metric for DTXS Silk Road Investment Holdings, this is the formula:

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

0.0035 = HK$4.4m ÷ (HK$2.5b - HK$1.2b) (Based on the trailing twelve months to December 2020).

So, DTXS Silk Road Investment Holdings has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 2.7%.

View our latest analysis for DTXS Silk Road Investment 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'd like to look at how DTXS Silk Road Investment Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is DTXS Silk Road Investment Holdings' ROCE Trending?

We're delighted to see that DTXS Silk Road Investment Holdings 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 0.3% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, DTXS Silk Road Investment Holdings is utilizing 102% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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 49% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

Overall, DTXS Silk Road Investment Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 27% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

DTXS Silk Road Investment Holdings does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

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This article by Simply Wall St is general in nature. 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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