The Return Trends At Daohe Global Group (HKG:915) Look Promising

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Daohe Global Group (HKG:915) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Daohe Global Group, this is the formula:

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

0.037 = US$454k ÷ (US$26m - US$14m) (Based on the trailing twelve months to December 2022).

Thus, Daohe Global Group has an ROCE of 3.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.2%.

View our latest analysis for Daohe Global 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 Daohe Global Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Daohe Global Group's ROCE Trending?

Like most people, we're pleased that Daohe Global Group is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Daohe Global Group is using 91% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Daohe Global Group could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

From what we've seen above, Daohe Global Group has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 78% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Like most companies, Daohe Global Group does come with some risks, and we've found 4 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.