Why The 31% Return On Capital At S.A.S. Dragon Holdings (HKG:1184) Should Have Your Attention

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in S.A.S. Dragon Holdings' (HKG:1184) returns on capital, so let's have a look.

Understanding 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)

0.31 = HK$878m ÷ (HK$8.9b - HK$6.1b) (Based on the trailing twelve months to June 2021).

Thus, S.A.S. Dragon Holdings has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 7.3% earned by companies in a similar industry.

See our latest analysis for S.A.S. Dragon Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for S.A.S. Dragon Holdings' ROCE against it's prior returns. If you'd like to look at how S.A.S. Dragon Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at S.A.S. Dragon Holdings are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 155% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that S.A.S. Dragon Holdings has a current liabilities to total assets ratio of 68%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On S.A.S. Dragon Holdings' ROCE

All in all, it's terrific to see that S.A.S. Dragon Holdings is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

S.A.S. Dragon Holdings does have some risks though, and we've spotted 3 warning signs for S.A.S. Dragon Holdings that you might be interested in.

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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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.