The Returns On Capital At Deewin Tianxia (HKG:2418) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Deewin Tianxia (HKG:2418) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Deewin Tianxia, this is the formula:

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

0.063 = CN¥288m ÷ (CN¥9.2b - CN¥4.6b) (Based on the trailing twelve months to December 2022).

So, Deewin Tianxia has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Transportation industry average of 7.6%.

View 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 past earnings, revenue and cash flow.

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

On the surface, the trend of ROCE at Deewin Tianxia doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last three years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Deewin Tianxia has done well to pay down its current liabilities to 50% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Deewin Tianxia's ROCE

We're a bit apprehensive about Deewin Tianxia because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 7.7% return over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Deewin Tianxia does have some risks, we noticed 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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.