Donaco International (ASX:DNA) Is Doing The Right Things To Multiply Its Share Price

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 when we looked at Donaco International (ASX:DNA) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Donaco International is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.077 = AU$10m ÷ (AU$183m - AU$51m) (Based on the trailing twelve months to December 2023).

Thus, Donaco International has an ROCE of 7.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 10.0%.

Check out our latest analysis for Donaco International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Donaco International's ROCE against it's prior returns. If you're interested in investigating Donaco International's past further, check out this free graph covering Donaco International's past earnings, revenue and cash flow.

What Does the ROCE Trend For Donaco International Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Donaco International. We found that the returns on capital employed over the last five years have risen by 21%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Donaco International appears to been achieving more with less, since the business is using 66% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 28% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

In summary, it's great to see that Donaco International has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 71% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you want to continue researching Donaco International, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Donaco International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com