Should We Be Excited About The Trends Of Returns At Deufol (HMSE:DE1)?

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Deufol (HMSE:DE1) 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?

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. Analysts use this formula to calculate it for Deufol:

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

0.011 = €2.1m ÷ (€269m - €79m) (Based on the trailing twelve months to December 2019).

Thus, Deufol has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Logistics industry average of 8.4%.

See 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're interested in investigating Deufol's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Deufol's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 2.7% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Deufol's ROCE

To conclude, we've found that Deufol is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 76% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 5 warning signs with Deufol (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

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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