If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Driver Group (LON:DRV) so let's look a bit deeper.
What is 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 Driver Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£2.6m ÷ (UK£35m - UK£14m) (Based on the trailing twelve months to September 2020).
Therefore, Driver Group has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Driver Group's ROCE against it's prior returns. If you're interested in investigating Driver Group's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Driver Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Driver Group is utilizing 35% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
Our Take On Driver Group's ROCE
To the delight of most shareholders, Driver Group has now broken into profitability. Since the stock has only returned 16% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On a final note, we've found 5 warning signs for Driver Group that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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