Why We Like The Returns At Daohe Global Group (HKG:915)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 the ROCE trend of Daohe Global Group (HKG:915) we really liked what we saw.

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).

Therefore, 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 4.9%.

View 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.

The Trend Of ROCE

We're delighted to see that Daohe Global Group is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 25% which is no doubt a relief for some early shareholders. 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 87%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

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 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.

What We Can Learn From Daohe Global Group's ROCE

In summary, it's great to see that Daohe Global Group has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 95% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Daohe Global Group does have some risks though, and we've spotted 2 warning signs for Daohe Global Group that you might be interested in.

Daohe Global Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.