Returns On Capital Are Showing Encouraging Signs At Deoleo (BME:OLE)

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Deoleo (BME:OLE) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Deoleo is:

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

0.081 = €62m ÷ (€883m - €117m) (Based on the trailing twelve months to March 2021).

So, Deoleo has an ROCE of 8.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

See our latest analysis for Deoleo

Historical performance is a great place to start when researching a stock so above you can see the gauge for Deoleo's ROCE against it's prior returns. If you'd like to look at how Deoleo 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 Deoleo's ROCE Trend?

It's great to see that Deoleo has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 8.1% on their capital employed. In regards to capital employed, Deoleo is using 38% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

In Conclusion...

From what we've seen above, Deoleo has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 89% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 3 warning signs we've spotted with Deoleo (including 2 which are potentially serious) .

While Deoleo 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. 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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