Investors Will Want dentalcorp Holdings' (TSE:DNTL) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, dentalcorp Holdings (TSE:DNTL) looks quite promising in regards to its trends of return on capital.

Understanding 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 dentalcorp Holdings, this is the formula:

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

0.0025 = CA$7.8m ÷ (CA$3.3b - CA$207m) (Based on the trailing twelve months to September 2022).

Thus, dentalcorp Holdings has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 8.3%.

Our analysis indicates that DNTL is potentially undervalued!

Above you can see how the current ROCE for dentalcorp Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering dentalcorp Holdings here for free.

What The Trend Of ROCE Can Tell Us

The fact that dentalcorp Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About two years ago the company was generating losses but things have turned around because it's now earning 0.3% on its capital. In addition to that, dentalcorp Holdings is employing 29% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From dentalcorp Holdings' ROCE

In summary, it's great to see that dentalcorp Holdings has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 55% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 1 warning sign for dentalcorp Holdings you'll probably want to know about.

While dentalcorp Holdings 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.