There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Precious Dragon Technology Holdings (HKG:1861), it didn't seem to tick all of these boxes.
What Is 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 Precious Dragon Technology Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = HK$67m ÷ (HK$485m - HK$122m) (Based on the trailing twelve months to December 2023).
Thus, Precious Dragon Technology Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.2% it's much better.
View our latest analysis for Precious Dragon Technology Holdings
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Precious Dragon Technology Holdings.
What The Trend Of ROCE Can Tell Us
Over the past five years, Precious Dragon Technology Holdings' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Precious Dragon Technology Holdings to be a multi-bagger going forward.
The Key Takeaway
We can conclude that in regards to Precious Dragon Technology Holdings' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 39% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing, we've spotted 1 warning sign facing Precious Dragon Technology Holdings that you might find interesting.
While Precious Dragon Technology Holdings 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.
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