Returns Are Gaining Momentum At DGR Global (ASX:DGR)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at DGR Global (ASX:DGR) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for DGR Global, this is the formula:

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

0.017 = AU$437k ÷ (AU$44m - AU$19m) (Based on the trailing twelve months to December 2024).

Therefore, DGR Global has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.4%.

Check out our latest analysis for DGR Global

Historical performance is a great place to start when researching a stock so above you can see the gauge for DGR Global'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 DGR Global.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that DGR Global is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.7% on their capital employed. Additionally, the business is utilizing 76% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. DGR Global could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 43% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

In summary, it's great to see that DGR Global has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 74% over the last five years, there may be other factors affecting the company's 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'd like to know about the risks facing DGR Global, we've discovered 4 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.