There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Dropbox (NASDAQ:DBX) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Dropbox:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0094 = US$17m ÷ (US$2.7b – US$982m) (Based on the trailing twelve months to June 2020).
Thus, Dropbox has an ROCE of 0.9%. Ultimately, that’s a low return and it under-performs the Software industry average of 8.8%.
Above you can see how the current ROCE for Dropbox compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Dropbox.
What Can We Tell From Dropbox’s ROCE Trend?
Dropbox has recently broken into profitability so their prior investments seem to be paying off. About four years ago the company was generating losses but things have turned around because it’s now earning 0.9% on its capital. Not only that, but the company is utilizing 315% more capital than before, but that’s to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.In another part of our analysis, we noticed that the company’s ratio of current liabilities to total assets decreased to 36%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.
The Key Takeaway
To the delight of most shareholders, Dropbox has now broken into profitability. And with a respectable 14% awarded to those who held the stock over the last year, you could argue that these trends are starting to get the attention they deserve. In light of that, we think it’s worth looking further into this stock because if Dropbox can keep these trends up, it could have a bright future ahead.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
While Dropbox 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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