DTXS Silk Road Investment Holdings' (HKG:620) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at DTXS Silk Road Investment Holdings (HKG:620) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for DTXS Silk Road Investment Holdings:

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

0.094 = HK$240m ÷ (HK$3.8b - HK$1.2b) (Based on the trailing twelve months to June 2022).

So, DTXS Silk Road Investment Holdings has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Retail Distributors industry average of 4.7%.

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're interested in investigating DTXS Silk Road Investment Holdings' past further, check out 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. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.4% on its capital. Not only that, but the company is utilizing 195% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

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 33% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On DTXS Silk Road Investment Holdings' ROCE

Long story short, we're delighted to see that DTXS Silk Road Investment Holdings' reinvestment activities have paid off and the company is now profitable. However the stock is down a substantial 91% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing: We've identified 2 warning signs with DTXS Silk Road Investment Holdings (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While DTXS Silk Road Investment Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.