If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of ADF Group (TSE:DRX) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ADF Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = CA$85m ÷ (CA$308m - CA$80m) (Based on the trailing twelve months to January 2025).
Thus, ADF Group has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 3.8% earned by companies in a similar industry.
View our latest analysis for ADF Group
Above you can see how the current ROCE for ADF Group 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 analyst report for ADF Group .
The Trend Of ROCE
ADF Group is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 37%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 85%. So we're very much inspired by what we're seeing at ADF Group thanks to its ability to profitably reinvest capital.
The Bottom Line On ADF Group's ROCE
In summary, it's great to see that ADF Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if ADF Group can keep these trends up, it could have a bright future ahead.
On a final note, we found 2 warning signs for ADF Group (1 shouldn't be ignored) you should be aware of.
ADF Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.