What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think DCC (LON:DCC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for DCC, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = UK£498m ÷ (UK£9.6b - UK£3.8b) (Based on the trailing twelve months to March 2022).
So, DCC has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.4% generated by the Industrials industry, it's much better.
View our latest analysis for DCC
Above you can see how the current ROCE for DCC compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering DCC here for free.
So How Is DCC's ROCE Trending?
The returns on capital haven't changed much for DCC in recent years. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 75% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
As we've seen above, DCC's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
DCC could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While DCC 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.
About LSE:DCC
DCC
Engages in the sales, marketing, and distribution of carbon energy solutions worldwide.
Very undervalued with flawless balance sheet and pays a dividend.
