The Trend Of High Returns At Daxin Materials (TPE:5234) Has Us Very Interested

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Daxin Materials (TPE:5234) we really liked what we saw.

Understanding 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 Daxin Materials, this is the formula:

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

0.25 = NT$762m ÷ (NT$4.2b - NT$1.1b) (Based on the trailing twelve months to September 2020).

Thus, Daxin Materials has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 6.7%.

View our latest analysis for Daxin Materials

Above you can see how the current ROCE for Daxin Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Daxin Materials here for free.

What Can We Tell From Daxin Materials' ROCE Trend?

We like the trends that we're seeing from Daxin Materials. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. The amount of capital employed has increased too, by 49%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Daxin Materials has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Daxin Materials' ROCE

To sum it up, Daxin Materials has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 310% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Daxin Materials does have some risks though, and we've spotted 1 warning sign for Daxin Materials that you might be interested in.

Daxin Materials 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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