Deewin Tianxia (HKG:2418) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Deewin Tianxia (HKG:2418), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Deewin Tianxia is:

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

0.048 = CN¥217m ÷ (CN¥10b - CN¥5.6b) (Based on the trailing twelve months to June 2024).

Thus, Deewin Tianxia has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Transportation industry average of 6.1%.

Check out our latest analysis for Deewin Tianxia

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'd like to look at how Deewin Tianxia has performed in the past in other metrics, you can view this free graph of Deewin Tianxia's past earnings, revenue and cash flow.

What Can We Tell From Deewin Tianxia's ROCE Trend?

In terms of Deewin Tianxia's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 4.8% from 10% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Deewin Tianxia has done well to pay down its current liabilities to 55% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 55% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Deewin Tianxia's ROCE

To conclude, we've found that Deewin Tianxia is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 15% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Deewin Tianxia, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.

While Deewin Tianxia 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.