DSW Capital (LON:DSW) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at DSW Capital (LON:DSW) and its ROCE trend, we weren't exactly thrilled.

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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 DSW Capital, this is the formula:

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

0.015 = UK£114k ÷ (UK£8.3m - UK£555k) (Based on the trailing twelve months to September 2024).

Therefore, DSW Capital has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 17%.

Check out our latest analysis for DSW Capital

Above you can see how the current ROCE for DSW Capital compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for DSW Capital .

What Can We Tell From DSW Capital's ROCE Trend?

On the surface, the trend of ROCE at DSW Capital doesn't inspire confidence. Around five years ago the returns on capital were 49%, but since then they've fallen to 1.5%. However it looks like DSW Capital might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, DSW Capital has decreased its current liabilities to 6.7% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On DSW Capital's ROCE

In summary, DSW Capital is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 47% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think DSW Capital has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for DSW Capital (of which 2 are concerning!) that you should know about.

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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.