Should You Be Impressed By Duncan Fox's (SNSE:DUNCANFOX) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Duncan Fox (SNSE:DUNCANFOX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 Duncan Fox:

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

0.072 = CL$18b ÷ (CL$297b - CL$46b) (Based on the trailing twelve months to June 2020).

Thus, Duncan Fox has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Food industry average of 8.2%.

Check out our latest analysis for Duncan Fox

Historical performance is a great place to start when researching a stock so above you can see the gauge for Duncan Fox's ROCE against it's prior returns. If you'd like to look at how Duncan Fox has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Duncan Fox's ROCE Trending?

When we looked at the ROCE trend at Duncan Fox, we didn't gain much confidence. Around five years ago the returns on capital were 9.8%, but since then they've fallen to 7.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Duncan Fox's ROCE

In summary, Duncan Fox is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 89% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with Duncan Fox and understanding this should be part of your investment process.

While Duncan Fox 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. 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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