Why The 37% Return On Capital At PDD Holdings (NASDAQ:PDD) Should Have Your Attention

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at PDD Holdings' (NASDAQ:PDD) look very promising so lets take a look.

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

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. Analysts use this formula to calculate it for PDD Holdings:

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

0.37 = CN¥105b ÷ (CN¥467b - CN¥180b) (Based on the trailing twelve months to September 2024).

So, PDD Holdings has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 12%.

See our latest analysis for PDD Holdings

Above you can see how the current ROCE for PDD Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for PDD Holdings .

What Can We Tell From PDD Holdings' ROCE Trend?

PDD Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 37% which is a sight for sore eyes. In addition to that, PDD Holdings is employing 815% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 39%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that PDD Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From PDD Holdings' ROCE

To the delight of most shareholders, PDD Holdings has now broken into profitability. Since the stock has returned a staggering 144% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with PDD Holdings and understanding it should be part of your investment process.

PDD 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.