The Return Trends At Domain Holdings Australia (ASX:DHG) Look Promising

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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)?

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)

0.038 = AU$54m ÷ (AU$1.5b - AU$68m) (Based on the trailing twelve months to December 2022).

Thus, Domain Holdings Australia has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 8.8%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Domain Holdings Australia Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at Domain Holdings Australia promising. The figures show that over the last five years, ROCE has grown 107% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To sum it up, Domain Holdings Australia is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 23% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Like most companies, Domain Holdings Australia does come with some risks, and we've found 1 warning sign that you should be aware of.

While Domain Holdings Australia 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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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.