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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Daohe Global Group (HKG:915) 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. Analysts use this formula to calculate it for Daohe Global Group:

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

0.09 = US$1.3m ÷ (US$29m - US$15m) (Based on the trailing twelve months to December 2023).

So, Daohe Global Group has an ROCE of 9.0%. On its own, that's a low figure but it's around the 7.5% average generated by the Retail Distributors industry.

Check out our latest analysis for Daohe Global Group

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

How Are Returns Trending?

Like most people, we're pleased that Daohe Global Group is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 9.0% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 54% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

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. The current liabilities has increased to 52% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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.

What We Can Learn From Daohe Global Group's ROCE

In the end, Daohe Global Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 60% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Daohe Global Group, we've discovered 2 warning signs that you should be aware of.

While Daohe Global Group 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.

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