Dampskibsselskabet Norden (CPH:DNORD) Is Experiencing Growth In Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Speaking of which, we noticed some great changes in Dampskibsselskabet Norden's (CPH:DNORD) returns on capital, so let's have a look.

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. To calculate this metric for Dampskibsselskabet Norden, this is the formula:

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

0.075 = US$100m ÷ (US$1.9b - US$571m) (Based on the trailing twelve months to March 2021).

Therefore, Dampskibsselskabet Norden has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 6.1% generated by the Shipping industry, it's much better.

View our latest analysis for Dampskibsselskabet Norden

In the above chart we have measured Dampskibsselskabet Norden's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Dampskibsselskabet Norden's ROCE Trending?

Shareholders will be relieved that Dampskibsselskabet Norden has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 7.5% on its capital. While returns have increased, the amount of capital employed by Dampskibsselskabet Norden has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 30% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Dampskibsselskabet Norden's ROCE

To bring it all together, Dampskibsselskabet Norden has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 129% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Dampskibsselskabet Norden can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for Dampskibsselskabet Norden (1 can't be ignored) you should be aware of.

While Dampskibsselskabet Norden 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.
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