discoverIE Group (LON:DSCV) Has More To Do To Multiply In Value Going Forward

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating discoverIE Group (LON:DSCV), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on discoverIE Group is:

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

0.088 = UK£38m ÷ (UK£586m - UK£151m) (Based on the trailing twelve months to March 2023).

So, discoverIE Group has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 12%.

See our latest analysis for discoverIE Group

In the above chart we have measured discoverIE Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering discoverIE Group here for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for discoverIE Group in recent years. The company has consistently earned 8.8% for the last five years, and the capital employed within the business has risen 109% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In conclusion, discoverIE Group has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

While discoverIE Group doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While discoverIE Group 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.