Investors Met With Slowing Returns on Capital At DKSH Holding (VTX:DKSH)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So, when we ran our eye over DKSH Holding's (VTX:DKSH) trend of ROCE, we liked what we saw.

Understanding 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. To calculate this metric for DKSH Holding, this is the formula:

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

0.13 = CHF272m ÷ (CHF5.3b - CHF3.1b) (Based on the trailing twelve months to June 2021).

Thus, DKSH Holding has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Professional Services industry.

Check out our latest analysis for DKSH Holding

In the above chart we have measured DKSH Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering DKSH Holding here for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 30% in that time. 13% is a pretty standard return, and it provides some comfort knowing that DKSH Holding has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, DKSH Holding's current liabilities are still rather high at 59% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From DKSH Holding's ROCE

In the end, DKSH Holding has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 30% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if DKSH Holding is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

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

While DKSH Holding 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.

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.

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