There's Been No Shortage Of Growth Recently For DUG Technology's (ASX:DUG) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in DUG Technology's (ASX:DUG) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for DUG Technology:

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

0.14 = US$4.0m ÷ (US$46m - US$16m) (Based on the trailing twelve months to December 2022).

Thus, DUG Technology has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Software industry.

See our latest analysis for DUG Technology

Above you can see how the current ROCE for DUG Technology 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 report for DUG Technology.

What Does the ROCE Trend For DUG Technology Tell Us?

DUG Technology has not disappointed with their ROCE growth. The figures show that over the last four years, ROCE has grown 382% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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 35% of its operations, which isn't ideal. 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.

Our Take On DUG Technology's ROCE

In summary, we're delighted to see that DUG Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 27% return over the last three years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While DUG Technology looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether DUG is currently trading for a fair price.

While DUG Technology 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.