If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Delfingen Industry (EPA:ALDEL) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Delfingen Industry:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = €42m ÷ (€329m - €86m) (Based on the trailing twelve months to June 2021).
So, Delfingen Industry has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 11% it's much better.
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 Delfingen Industry's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Delfingen Industry's ROCE Trend?
The trends we've noticed at Delfingen Industry are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 125%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Delfingen Industry's ROCE
All in all, it's terrific to see that Delfingen Industry is reaping the rewards from prior investments and is growing its capital base. And with a respectable 57% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Delfingen Industry can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Delfingen Industry we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.
While Delfingen Industry 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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