Here's What Daqo New Energy's (NYSE:DQ) Strong Returns On Capital Mean
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So, when we ran our eye over Daqo New Energy's (NYSE:DQ) trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)
0.20 = US$1.3b ÷ (US$7.3b - US$810m) (Based on the trailing twelve months to September 2023).
Thus, Daqo New Energy has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Daqo New Energy Tell Us?
It's hard not to be impressed by Daqo New Energy's returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 880% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Daqo New Energy can keep this up, we'd be very optimistic about its future.
The Bottom Line
Daqo New Energy has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 347% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One final note, you should learn about the 3 warning signs we've spotted with Daqo New Energy (including 1 which is potentially serious) .
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
