There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating discoverIE Group (LON:DSCV), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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. The formula for this calculation on discoverIE Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = UK£33m ÷ (UK£557m - UK£123m) (Based on the trailing twelve months to September 2022).
Therefore, discoverIE Group has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 13%.
View 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 to see what analysts are forecasting going forward, you should check out our free report for discoverIE Group.
SWOT Analysis for discoverIE Group
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Electrical market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow for the next 3 years.
- Annual earnings are forecast to grow slower than the British market.
The Trend Of ROCE
In terms of discoverIE Group's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.5% for the last five years, and the capital employed within the business has risen 126% 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.
In Conclusion...
In conclusion, discoverIE Group has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 94% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you're still interested in discoverIE Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
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.
About LSE:DSCV
discoverIE Group
Designs, manufactures, and supplies components for electronic applications worldwide.
Adequate balance sheet second-rate dividend payer.
