What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Deutsche Post (ETR:DHL) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Deutsche Post is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €5.8b ÷ (€67b - €20b) (Based on the trailing twelve months to December 2023).
So, Deutsche Post has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.
View our latest analysis for Deutsche Post
Above you can see how the current ROCE for Deutsche Post compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Deutsche Post .
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Deutsche Post. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 37%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Key Takeaway
To sum it up, Deutsche Post has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 50% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Deutsche Post can keep these trends up, it could have a bright future ahead.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for DHL on our platform that is definitely worth checking out.
While Deutsche Post 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. 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.
About XTRA:DHL
Deutsche Post
Operates as a mail and logistics company in Germany, rest of Europe, the Americas, the Asia Pacific, the Middle East, and Africa.
6 star dividend payer and undervalued.
