Investors Met With Slowing Returns on Capital At Domain Holdings Australia (ASX:DHG)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Domain Holdings Australia (ASX:DHG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Domain Holdings Australia:

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

0.053 = AU$76m ÷ (AU$1.5b - AU$53m) (Based on the trailing twelve months to December 2023).

Thus, Domain Holdings Australia has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 8.0%.

View our latest analysis for Domain Holdings Australia

Above you can see how the current ROCE for Domain Holdings Australia 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 analyst report for Domain Holdings Australia .

How Are Returns Trending?

There hasn't been much to report for Domain Holdings Australia's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Domain Holdings Australia to be a multi-bagger going forward. On top of that you'll notice that Domain Holdings Australia has been paying out a large portion (63%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

Our Take On Domain Holdings Australia's ROCE

We can conclude that in regards to Domain Holdings Australia's returns on capital employed and the trends, there isn't much change to report on. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you're still interested in Domain Holdings Australia it's worth checking out our FREE intrinsic value approximation for DHG to see if it's trading at an attractive price in other respects.

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.