What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Deewin Tianxia (HKG:2418), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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 Deewin Tianxia:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = CN¥217m ÷ (CN¥10b - CN¥5.6b) (Based on the trailing twelve months to June 2024).
Thus, Deewin Tianxia has an ROCE of 4.8%. On its own, that's a low figure but it's around the 5.9% average generated by the Transportation industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Deewin Tianxia's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Deewin Tianxia.
So How Is Deewin Tianxia's ROCE Trending?
When we looked at the ROCE trend at Deewin Tianxia, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last four years. However it looks like Deewin Tianxia might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Deewin Tianxia has decreased its current liabilities to 55% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 55% is still pretty high, so those risks are still somewhat prevalent.
The Key Takeaway
To conclude, we've found that Deewin Tianxia is reinvesting in the business, but returns have been falling. Since the stock has declined 39% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Deewin Tianxia has the makings of a multi-bagger.
Deewin Tianxia does have some risks, we noticed 5 warning signs (and 3 which are a bit concerning) we think you should 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.
