Under The Bonnet, Daohe Global Group's (HKG:915) Returns Look Impressive

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Daohe Global Group (HKG:915) looks great, so lets see what the trend can tell us.

What Is Return On Capital Employed (ROCE)?

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)

0.25 = US$3.1m ÷ (US$30m - US$17m) (Based on the trailing twelve months to June 2022).

So, Daohe Global Group has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Retail Distributors industry average of 9.4%.

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'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. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 88%. This could potentially mean that the company is selling some of its assets.

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 58% 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 On 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. And since the stock has dived 97% 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.

If you'd like to know more about Daohe Global Group, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.