DP Aircraft I (LON:DPA) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at DP Aircraft I (LON:DPA) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on DP Aircraft I is:

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

0.099 = US$14m ÷ (US$159m - US$19m) (Based on the trailing twelve months to December 2022).

Therefore, DP Aircraft I has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 14%.

See our latest analysis for DP Aircraft I

Historical performance is a great place to start when researching a stock so above you can see the gauge for DP Aircraft I's ROCE against it's prior returns. If you'd like to look at how DP Aircraft I has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From DP Aircraft I's ROCE Trend?

DP Aircraft I has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 53%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 70% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line

In the end, DP Aircraft I has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 93% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing: We've identified 2 warning signs with DP Aircraft I (at least 1 which is significant) , and understanding these would certainly be useful.

While DP Aircraft I 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.