Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. First, we will want to see a return on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. With that in mind, we’ve noticed some promising trends at Dickson Concepts (International) (HKG: 113) so let’s look a little deeper.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Dickson Concepts (International) is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.13 = HK $ 501 million ÷ (HK $ 5.4 billion – HK $ 1.6 billion) (Based on the last twelve months up to March 2021).
Therefore, Dickson Concepts (International) has a ROCE of 13%. In absolute terms, this is a satisfactory performance, but compared to the specialty retail industry average of 9.2%, it is much better.
See our latest review for Dickson Concepts (International)
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dig deeper into Dickson Concepts (International) past, check out this free graph of past income, income and cash flow.
What can we say about the ROCE trend of Dickson Concepts (International)?
Dickson Concepts (International) recently broke into profitability, so their past investments appear to be paying off. Shareholders will no doubt be delighted because the company was in deficit five years ago but now generates 13% of its capital. Not only that, but the business is using 84% more capital than before, but that’s to be expected of a business trying to achieve profitability. We like this trend because it tells us that the company has profitable reinvestment opportunities, and if it keeps moving forward it can lead to multi-bagger performance.
What we can learn from Dickson Concepts (International) ROCE
To the delight of most shareholders, Dickson Concepts (International) has now returned to profitability. Given that the stock has returned 132% to shareholders over the past five years, it looks like investors are recognizing these changes. Therefore, we believe it would be worth checking out whether these trends will continue.
One more thing: we have identified 2 warning signs with Dickson Concepts (International) (at least 1 that shouldn’t be ignored), and understanding them would definitely be helpful.
If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.
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