Returns On Capital Are Showing Encouraging Signs At Deufol (HMSE:DE1)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Deufol (HMSE:DE1) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Deufol is:

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

0.063 = €13m ÷ (€265m - €64m) (Based on the trailing twelve months to June 2022).

So, Deufol has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Logistics industry average of 14%.

View our latest analysis for Deufol

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Deufol has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Deufol's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.3%. The amount of capital employed has increased too, by 23%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Deufol's ROCE

To sum it up, Deufol has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 12% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Deufol does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Deufol 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.