Investors Will Want Daldrup & Söhne's (ETR:4DS) 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. 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 looked at Daldrup & Söhne (ETR:4DS) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Daldrup & Söhne, this is the formula:

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

0.084 = €2.0m ÷ (€39m - €15m) (Based on the trailing twelve months to June 2022).

So, Daldrup & Söhne has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Energy Services industry average of 7.4%.

See our latest analysis for Daldrup & Söhne

Above you can see how the current ROCE for Daldrup & Söhne 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 Daldrup & Söhne here for free.

What Does the ROCE Trend For Daldrup & Söhne Tell Us?

Daldrup & Söhne has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 1,177%. The company is now earning €0.08 per dollar of capital employed. In regards to capital employed, Daldrup & Söhne appears to been achieving more with less, since the business is using 66% less capital to run its operation. Daldrup & Söhne may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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.

What We Can Learn From Daldrup & Söhne's ROCE

From what we've seen above, Daldrup & Söhne has managed to increase it's returns on capital all the while reducing it's capital base. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Daldrup & Söhne (of which 1 shouldn't be ignored!) that you should know about.

While Daldrup & Söhne 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.

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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.