To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Success Dragon International Holdings (HKG:1182) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Success Dragon International Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = HK$1.8m ÷ (HK$200m - HK$81m) (Based on the trailing twelve months to September 2024).
So, Success Dragon International Holdings has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 10%.
Check out our latest analysis for Success Dragon International Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Success Dragon International Holdings' ROCE against it's prior returns. If you'd like to look at how Success Dragon International Holdings has performed in the past in other metrics, you can view this free graph of Success Dragon International Holdings' past earnings, revenue and cash flow.
How Are Returns Trending?
The fact that Success Dragon International Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.5% which is a sight for sore eyes. In addition to that, Success Dragon International Holdings is employing 247% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 41%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
In Conclusion...
In summary, it's great to see that Success Dragon International Holdings has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 84% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
If you want to continue researching Success Dragon International Holdings, you might be interested to know about the 4 warning signs that our analysis has discovered.
While Success Dragon International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.