Returns On Capital At Derichebourg (EPA:DBG) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Derichebourg's (EPA:DBG) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Derichebourg:

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

0.18 = €318m ÷ (€3.0b - €1.2b) (Based on the trailing twelve months to March 2022).

Thus, Derichebourg has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 8.4% it's much better.

View our latest analysis for Derichebourg

In the above chart we have measured Derichebourg's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Derichebourg.

What Does the ROCE Trend For Derichebourg Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 202% more capital in the last five years, and the returns on that capital have remained stable at 18%. 18% is a pretty standard return, and it provides some comfort knowing that Derichebourg has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 42% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 42%, some of that risk is still prevalent.

Our Take On Derichebourg's ROCE

The main thing to remember is that Derichebourg has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 14%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One more thing: We've identified 4 warning signs with Derichebourg (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Derichebourg 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. 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.