Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. That's why when we briefly looked at Daqo New Energy's (NYSE:DQ) ROCE trend, we were pretty happy with what we saw.
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 Daqo New Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$783m ÷ (US$7.4b - US$851m) (Based on the trailing twelve months to December 2023).
Thus, Daqo New Energy has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Semiconductor industry.
Check out our latest analysis for Daqo New Energy
Above you can see how the current ROCE for Daqo New Energy 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 Daqo New Energy for free.
How Are Returns Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 835% more capital in the last five years, and the returns on that capital have remained stable at 12%. 12% is a pretty standard return, and it provides some comfort knowing that Daqo New Energy has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
What We Can Learn From Daqo New Energy's ROCE
The main thing to remember is that Daqo New Energy has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 289% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a separate note, we've found 1 warning sign for Daqo New Energy you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About NYSE:DQ
Daqo New Energy
Manufactures and sells polysilicon to photovoltaic product manufacturers in the People’s Republic of China.
Flawless balance sheet with high growth potential.
