Can S.A.S. Dragon Holdings (HKG:1184) Keep Up These Impressive Returns?

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over S.A.S. Dragon Holdings' (HKG:1184) trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for S.A.S. Dragon Holdings:

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

0.22 = HK$489m ÷ (HK$5.6b - HK$3.4b) (Based on the trailing twelve months to December 2019).

So, S.A.S. Dragon Holdings has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Electronic industry average of 8.6%.

Check out our latest analysis for S.A.S. Dragon Holdings

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're interested in investigating S.A.S. Dragon Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From S.A.S. Dragon Holdings' ROCE Trend?

In terms of S.A.S. Dragon Holdings' history of ROCE, it's quite impressive. The company has employed 118% more capital in the last five years, and the returns on that capital have remained stable at 22%. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 61% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

The Bottom Line

In summary, we're delighted to see that S.A.S. Dragon Holdings has been compounding returns by reinvesting at consistently high rates of return as these are common traits of a multi-bagger. And long term investors would be thrilled with the 100% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 2 warning signs for S.A.S. Dragon Holdings you'll probably want to know about.

S.A.S. Dragon Holdings 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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