Shareholders Would Enjoy A Repeat Of Daqo New Energy's (NYSE:DQ) Recent Growth In Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Daqo New Energy (NYSE:DQ) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Daqo New Energy:

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

0.37 = US$2.7b ÷ (US$8.2b - US$941m) (Based on the trailing twelve months to March 2023).

Thus, Daqo New Energy has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 13%.

View our latest analysis for Daqo New Energy

In the above chart we have measured Daqo New Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Daqo New Energy.

The Trend Of ROCE

The trends we've noticed at Daqo New Energy are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 37%. Basically the business is earning more per dollar of capital invested and in addition to that, 1,160% more capital is being employed now too. So we're very much inspired by what we're seeing at Daqo New Energy thanks to its ability to profitably reinvest capital.

One more thing to note, Daqo New Energy has decreased current liabilities to 11% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Daqo New Energy's ROCE

To sum it up, Daqo New Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 232% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Daqo New Energy does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.