Delticom (ETR:DEX) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Delticom (ETR:DEX), it didn't seem to tick all of these boxes.

What is 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 Delticom, this is the formula:

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

0.083 = €7.1m ÷ (€217m - €132m) (Based on the trailing twelve months to December 2021).

Thus, Delticom has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Online Retail industry average of 7.5%.

See our latest analysis for Delticom

In the above chart we have measured Delticom'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 Delticom here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Delticom. The company has employed 24% more capital in the last five years, and the returns on that capital have remained stable at 8.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a separate but related note, it's important to know that Delticom has a current liabilities to total assets ratio of 61%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Delticom's ROCE

In summary, Delticom has simply been reinvesting capital and generating the same low rate of return as before. Moreover, since the stock has crumbled 78% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Delticom has the makings of a multi-bagger.

On a separate note, we've found 4 warning signs for Delticom you'll probably want to know about.

While Delticom 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.