Dr. Martens (LON:DOCS) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Dr. Martens (LON:DOCS) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Dr. Martens:

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

0.16 = UK£126m ÷ (UK£952m - UK£154m) (Based on the trailing twelve months to March 2024).

So, Dr. Martens has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Luxury industry.

View our latest analysis for Dr. Martens

In the above chart we have measured Dr. Martens' 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 Dr. Martens for free.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 107% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Dr. Martens has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Dr. Martens' ROCE

The main thing to remember is that Dr. Martens has proven its ability to continually reinvest at respectable rates of return. Despite these impressive fundamentals, the stock has collapsed 83% over the last three years, so there is likely other factors affecting the company's future prospects. So in light of that'd we think it's worthwhile looking further into this stock to see if there's any areas for concern.

Like most companies, Dr. Martens does come with some risks, and we've found 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com