Returns Are Gaining Momentum At DTXS Silk Road Investment Holdings (HKG:620)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at DTXS Silk Road Investment Holdings (HKG:620) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. 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)

0.12 = HK$191m ÷ (HK$3.8b - HK$2.1b) (Based on the trailing twelve months to June 2023).

Therefore, DTXS Silk Road Investment Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Retail Distributors industry.

View our latest analysis for DTXS Silk Road Investment Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for DTXS Silk Road Investment Holdings' ROCE against it's prior returns. If you're interested in investigating DTXS Silk Road Investment Holdings' past further, check out this free graph covering DTXS Silk Road Investment Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

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. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 56% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On DTXS Silk Road Investment Holdings' ROCE

In summary, it's great to see that DTXS Silk Road Investment Holdings has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 91% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

DTXS Silk Road Investment Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.