Domain Holdings Australia (ASX:DHG) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Domain Holdings Australia's (ASX:DHG) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Domain Holdings Australia, this is the formula:

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

0.044 = AU$54m ÷ (AU$1.3b - AU$55m) (Based on the trailing twelve months to December 2020).

Thus, Domain Holdings Australia has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 11%.

See our latest analysis for Domain Holdings Australia

In the above chart we have measured Domain Holdings Australia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Domain Holdings Australia.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last three years, returns on capital have grown by 143%. 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, Domain Holdings Australia appears to been achieving more with less, since the business is using 26% less capital to run its operation. Domain Holdings Australia may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On Domain Holdings Australia's ROCE

From what we've seen above, Domain Holdings Australia has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last three years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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. 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.
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