Will The ROCE Trend At Deoleo (BME:OLE) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Deoleo's (BME:OLE) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Deoleo is:

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

0.076 = €58m ÷ (€862m - €110m) (Based on the trailing twelve months to September 2020).

Therefore, Deoleo has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

Check out our latest analysis for Deoleo

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 want to delve into the historical earnings, revenue and cash flow of Deoleo, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that Deoleo is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 7.6% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 42% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line

In summary, it's great to see that Deoleo has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 13% to shareholders. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 2 warning signs for Deoleo you'll probably want to know about.

While Deoleo isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade Deoleo, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.