DNXCorp (EPA:ALDNX) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in DNXCorp's (EPA:ALDNX) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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

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

0.24 = €3.2m ÷ (€22m - €9.2m) (Based on the trailing twelve months to December 2020).

Therefore, DNXCorp has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 6.7%.

Check out our latest analysis for DNXCorp

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'd like to look at how DNXCorp has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is DNXCorp's ROCE Trending?

DNXCorp has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 252%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 71% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 41% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From DNXCorp's ROCE

In a nutshell, we're pleased to see that DNXCorp has been able to generate higher returns from less capital. Since the stock has returned a staggering 288% 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 DNXCorp can keep these trends up, it could have a bright future ahead.

DNXCorp does have some risks though, and we've spotted 2 warning signs for DNXCorp that you might be interested in.

DNXCorp is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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