What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).
So, 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 Does the ROCE Trend For Driver Group Tell Us?
We're delighted to see that Driver Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. And unsurprisingly, like most companies trying to break into the black, Driver Group is utilizing 35% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line On Driver Group's ROCE
To the delight of most shareholders, Driver Group has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 25% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing, we've spotted 4 warning signs facing Driver Group that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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